China has had a ravenous appetite for luxury goods in recent years as the newly affluent discover that wealth is something that must be flaunted. But is the demand for ultra-expensive jewellery and watches now petering out?
John Hempton of Bronte Capital thinks so. While the Australian hedge fund manager usually targets companies that look like frauds, betting that the stock prices will fall as the bogus financial numbers are discovered by authorities, he has taken a slightly different approach with global luxury goods makers: The companies are fine, but their business prospects are in decline.
No, this isn’t a strategy that hinges on a deteriorating Chinese economy. Instead, it hinges on what he sees as a cultural shift caused by the highly publicized ouster of politician Bo Xilai and the murder charge against his wife.
As Mr. Hempton explains, “A half million dollar watch no longer says ‘look at me.’ It says ‘look at me, I am a kleptocrat.’”
And if you think that this looks like only a short-term blip in conspicuous consumption, only to snap back when the scandal subsides, Mr. Hempton draws the parallel with Brazil. It, too, had a strong appetite for luxury goods in the 1980s and 1990s, until the kidnapping rate took off and demand for luxury goods collapsed.
In the case of China, he argues, bling will now mark you as an enemy of the people. He pointed out an article in the Daily Telegraph, which reported that a Chinese activist has taken to publishing online photos of Chinese officials sporting watches worth several thousand pounds each, and drawing the connection to corruption.
Mr. Hempton has taken this rather broad investing theme and winnowed it down to a single company right now: Switzerland-based Compagnie Financiere Richemont SA, which has a market capitalization of $30-billion (U.S.).
It’s a great company and well managed. But while Richemont sells jewellery, watches and leather goods in a number of places, the connection to China is clear: In Asia, the company’s sales growth over the past three years has averaged 28 per cent. Meanwhile, the share price is near a record high, after rising four-fold from its bear-market low in early 2009.
“The Chinese kleptocracy has been very good to Richemont,” Mr. Hempton said.
But he’s betting that the good days are nearing an end. He keeps an eye on Swiss watch data, where exports to Hong Kong – the place for buying ultra-luxury goods – have been rising by more than 20 per cent every month so far this year.
However, he’s also watching the demand-side of the equation – through Hong Kong’s sales tax data, which includes specific information on “jewellery, watches, clocks and valuable gifts”. Over the past two months, sales growth in this category has essentially ground to a halt.
“What do you do with an inventory glut of hundred thousand dollar watches?” he said. “You can’t really discount them – so they just sit there, looking a little stale and slowly devaluing your brand.
“And that is why I am short the stock. It is a trading short really – this company is likely to miss earnings and it will miss it in an unfortunate way – they are going to be swamped with inventory. “