The first week of April turned out to be basically a carbon copy of the previous one, if anything with maybe even slightly more positive features. Again in our basket of 20 stocks only 3 saw a weekly decline. Since the end of 2018 only 2 are now trading in negative territory.
Once again the mood of the market was quite buoyant, the S&P 500 gained around +1,9% while the Stoxx 600 spiked +2,40%. The European over-performance lead to a surge of the biggest players f Euro luxury, which saw weekly returns in many cases around +4%-5%.
Noticeable were also the gains recorded by auto companies, still mired in a troubled environment. The awesome bounce of the 2 German giants in our portfolio was likely not coincidentally at the very same time when Chinese stocks again went through the roof. For instance the Shanghai Composite, open only for 4 sessions last week, clocked another +5% rise.
As a matter of fact we are still happily in the paradigm we outlined one week ago: a widespread feel-good mood where China stands out and where luxury stocks strongly positively correlate with the equity of the second largest economy in the world.
Looking ahead after such a phenomenal inception of 2019 it is definitely wise to be a bit prudent as valuations are definitely not on the cheap side. LVMH for instance trades at 26.6 trailing earnings, with a price/sales ratio around 3.5 and a price/book of 5.2. Similar figures can be observed for Christian Dior (33.3, 1.65, 5.44) while Hermes trailing PE is actually north of 47.
Recently several times we have pointed out how, with a slowing economy looming over the horizon, it would be advisable to be over-weight the stocks of the most solid and competitive companies in the luxury sector. We think this is still sound advice but investors now can’t ignore the fact their multiples are quite high. This brings up the need to add another layer of protection, this time from the risk arising from those quality growth stocks which constitute the backbone of our portfolio. Next time we will see how.
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