Aus/NZ
The Australian market (ASX 200 Index, -0.6%) was down on Friday, snapping up a week-long rebound, as a hot inflation print in the US and tension in the Middle East rattle markets globally.
Noting the CEO of SkyCity Michael Ahearne has tendered his resignation effective March 2024 — SkyCity has been through it this year, with regulatory woes in Adelaide and its ongoing case against Macquarie re a parking deal gone bad. We don’t envy SkyCity’s management at the moment — the company has a lot to work through. Avoiding its stock as of now. Fletcher Building shares are down -10% as they exited their trading halt, BGC are manufacturing flaws for its plumbing products – considering the faults are concentrated in Perth, Fletchers claim it is driven by installation failures. The product has a fail rate of 0.19% across the board, however, the fail rate in Perth is 10.9% in Perth (57 times higher than normal). This would be a major overhang over the stock and we prefer to avoid the stock at current levels.
US
US Markets were down on Friday (S&P 500 Index, -0.6%) as rising tensions in the Middle East kept investors in a risk-off mood.
Gold reported its best day of the year up +3.1% on Friday, bringing its weekly gain to +5.2%, while oil jumped +5% on Friday.
The University of Michigan consumer sentiment for the US fell to 63 in October 2023 from 68.1 in September, the lowest in five months, and missing market estimates – which did not bode well. US earnings season commenced on Friday kicked off with strong earnings from the major banks JP Morgan (1.5%), Wells Fargo (3%) and Citigroup (-0.2%) which all beat market expectations on revenue and earnings.
Don’t worry, darling (LVMH will be fine)
LVMH reported Q3 results last week and the media – hysterical as usual – has been boldly declaring the “end of the luxury boom”. It’s true that LVMH had results which weren’t at pace with the blockbuster growth they’ve experienced in the last few years. Organic revenue grew +14%. Still, should it be a surprise that growth isn’t going gangbusters? We’re in a high interest rate environment with a recession still looming; and multiple wars are going on. It’s unrealistic to expect +20% growth in an environment such as this. Still – 14% growth is nothing to sneeze at. Nor is 62.2 billion euro of revenue for the 9 months ended 2023. It’s a lot of cash.
We think this feels more like revenue normalisation more than anything. One dark spot was revenues in Europe, which fell to single digits (+7%, vs +19% the previous quarter). Asia sales remained strong at +19% (China slowdown, who?). Breaking it down further, sales of champagne and cognac slumped a bit while leather and jewelry remained strong. It’s the second consecutive quarter that champagne sales have slumped – drinking has been on the decline internationally, and there is growing demand for smaller grower champagnes rather than the “warehorses” that LVMH trots out.
One salient fact – the number of millionaires in the world has quadrupled since 2020. And LVMH is “the” status symbol factory (not just Louis Vuitton, but Loro Piana, etc). Trading at 20x fwd earnings we think it looks like decent value (as always, the better way to play it is by buying Christian Dior – CDI – which trades at 17x earnings). Gucci owner Kering can be had for 14x earnings, while Richemont can be had for 17x. In order of preference: LVMH, Richemont, Kering.
And Manchester United…
This Manchester United deal has been going on for what feels like eons – frankly, we’re almost comatose over it. Now INEOS billionaire Jim Ratcliffe is in discussions to buy 25% of the club for £1.3bn. The deal makes no sense for shareholders. It doesn’t materially change the stock price. It gives a nice lump of cash (and valuation) the the current owners, the Glazers, but it doesn’t do a lot for common stockholders. Frankly, we think a buy-out from the Qataris was the better offer – £5bn cash. The Glazers have acted in their own interests versus the interests of shareholders (nice payday for them, common stockholders get nada). A disapointing outcome, but MANU fans will be looking forward to a change of ownership!
JP Morgan Chase (JPM.NYSE)
JP Morgan shares were up +1.5% after revealing their 2023 third-quarter result, which beat market expectations both on the top and bottom line. Revenue jumped +21% from last year to $40.69B driven by stronger than expected net interest income as it benefits from the current high interest rate environment.
The bank also cautioned that while the American consumer and businesses were healthy, households were spending down cash balances and that tight labour markets and high government debt meant interest rates could climb higher.
While JPM upgraded its earnings guidance, they also said that their current over-earnings from net interest income and below normal credit losses won’t last long – which is helping to boost earnings over the interim.
Shares of JPMorgan have climbed 8.7% this year through Thursday, far outperforming the 19% decline of the KBW Bank Index. We have a skew towards major banks that are well capitalised and trade at reasonable valuations – remain BUY rated on JPM.
Week Ahead
Tuesday
NZ Q3 Inflation data
Earnings: Johnson & Johnson, Bank of America, Goldman Sachs
Wednesday
US Retail Sales
UK and Canadian Inflation data
Earnings” Tesla, Procter & Gamble and Netflix
Thursday
Earnings: Taiwan Semiconductor, L’Oreal
Friday
Japan Inflation Earnings: American Express