Retail’s revival in the U.S. has slowed a bit of late, with the SPDR S&P Retail ETF (XRT) about 2% lower year-to-date. However, in China, especially among luxury shoppers, it’s full steam ahead–but not for the entire sector.
That’s according to HSBC’s Erwan Rambourg. After surveying affluent Chinese shoppers, he writes, he’s confident that 2018 will be another great year for luxury brands, even if there’s a slight deceleration from the “phenomenal” year that was 2017.
Consumer confidence is the highest it’s been in 25 years, he says, and Chinese consumers, unlike their U.S. counterparts, are more willing to spend money. That’s good news for luxury brands, especially those with stores on the mainland: Because of upscale-goods pricing and stricter border controls, more wealthy Chinese consumers are buying at home rather than abroad. This means that Chinese sales will finally be accretive this year, rather than margin-dilutive, as traffic and profits rise.
That said, Rambourg has just three Buy ratings throughout his coverage. There are three things that keep him from being more bullish–valuation (stocks are near 15-year highs), currency, and a slight decline from last year’s fantastic growth.
His Buy-rated stocks are Tiffany (TIF), Tapestry (TPR) (formerly Coach), and Kering (PPRUY), the parent of Gucci. He likes Tiffany’s positioning as an accessible, more-inclusive luxury brand, which resonates with younger Chinese buyers; Tapestry’s low valuation and portfolio of brands; and Kering for Gucci’s high growth and his belief that consensus estimates haven’t caught up with its potential.
Moving down the scale a bit, he’s bullish on sporting apparel and footwear stocks, with Adidas (ADDYY) as his favorite.