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War and Contagion Strike Again

For luxury shares, the early 2000s offer a guide to the present moment. But this time around, things could be much worse, writes Pierre Mallevays.
Russia’s invasion of Ukraine at the tail end of a pandemic recalls a world gripped with fear over the coming US invasion of Iraq and a SARS outbreak in Asia in the early noughties. But this time, things are much worse, writes Pierre Mallevays.
Russia’s invasion of Ukraine at the tail end of a pandemic recalls a world gripped with fear over the coming US invasion of Iraq and a SARS outbreak in Asia in the early noughties. But this time, things are much worse, writes Pierre Mallevays. (Getty Images)

Russia’s invasion of Ukraine has already taken a terrible human toll and sent the world into a tailspin. Western governments have responded by funneling money and weapons to Ukraine and unleashing new forms of economic warfare.

In the luxury sector, firms such as Richemont, Burberry, Hermès, LVMH, Kering and Chanel have suspended their operations in Russia, whilst a growing list of Russian oligarchs have effectively had their credit cards cancelled. The Savigny Luxury Index (SLI) dipped 3 percent on the day of invasion and is down by almost 12 percent since the beginning of the year, approaching the 15 percent slide we saw in March 2020 when the world went into lockdown.

In 2002 to 2003, the world was facing a similar situation. The US was talking up its planned invasion of Iraq while a new deadly airborne virus, SARS, was spreading in Asia. From George W Bush’s famous speech on the “axis of evil” in January 2002 to the day of the invasion of Iraq in March 2003, the SLI fell over 40 percent. This is what was being said then:

  • Domenico de Sole, president and CEO of Gucci Group: “In a war situation, our industry goes through a lot of suffering. The biggest impact will be on tourism. 40 percent of luxury goods purchases are made by travellers.”
  • Sagra Maceira de Rosen, luxury analyst at JP Morgan: “If a war happens, all bets are off. I will close my models, close my numbers and shut off my computer. Because there is nothing they’ll be able to do. Travel will stop. You know we are not talking here about the Balkans, which was an internal conflict. We are talking about the US and the rest of the world bombing Iraq. It’s going to be like the Gulf War when everything came to a standstill.”
  • Andrew Gowen, head of luxury research at Lehman Brothers: “If there’s going to be a war, it’s going to be a weak year. It will be a negative on the general economy. It’s the uncertainty of war and people not knowing how long or how intense it will be. All of the unknown puts fear in people’s minds. You become more cautious and more careful in your spending.”

All of the above apply today. The last point on the uncertainty of war, notably how long and how intense it will be, is particularly pertinent. In the case of Iraq, the threat from so-called “weapons of mass destruction” was a smoke screen. Now, we have a Russian leader with the world’s largest nuclear arsenal saying that nuclear retaliation is on the table should NATO interfere. This has people on high alert and is likely to seriously curb tourism to Europe, the world’s biggest luxury shopping destination, just as it was becoming easier to book flights.

The export bans imposed by Western governments will not have much direct impact on luxury sales. It is estimated that the Russian market accounts for only 1 to 2 percent of sales for most luxury brands. The freezing of assets belonging to oligarchs with links to the Kremlin will have some impact on niche segments of ultra luxury, such as super yachts and high jewellery, as well as super prime property, but billionaires are plenty these days. Forbes counts 2,755 of them worldwide, of which only 177 are Russian.

The elephant in the room is Russian oil. Russia is the world’s third largest producer of oil, behind the US and Saudi Arabia. One month into the conflict, the price of Brent crude has reached a 14-year high, fuelled, in part, by suggestions that European Union nations could join the US in a Russian oil embargo. Surging oil prices are concerning to a luxury goods industry that has already faced substantial increases to logistics costs as a result of the global supply chain crisis brought on by the pandemic. This is likely to impact on the bottom line, though firms will surely attempt to pass on at least some of the increased cost to consumers, something only the crème de la crème of the sector may be able to achieve.

The Savigny Luxury Index (“SLI”) fell 5 percent in February on the back of Russia’s invasion of Ukraine whilst the MSCI lost almost 3 percent of its value. As usual we see more pronounced volatility in luxury stocks compared to the rest of the market, the good news for the sector being that the ups tend to be greater than the downs relative to the market as a whole.

SLI vs. MSCI

SLI vs. MSCI

Going up

  • US luxury stocks such as Ralph Lauren, Capri Holdings and Tapestry posted gains of 19 percent, 13 percent and 8 percent respectively this month. This is likely due to the perception that their greater exposure to the North American market offers them some protection against a European conflict.

Going down

  • Groups with exposure to Europe and/or travel retail took the biggest hit this month, with LVMH losing the most value at almost 9 percent, followed by Safilo at 6 percent.
  • Luxury watch and jewellery maker Richemont fell almost 6 percent in February. The group operates at the higher end of luxury goods, which is likely to be more impacted by the sanctioning of Russia’s elite.

What to watch

The way things unfold in Ukraine will have a huge impact on the outlook for the sector. At best, the conflict will cool, but the world will still face a stiff increase in living costs and international travel will remain sluggish. The worst case is too horrible to think about.

Sector valuation

Sector valuation

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