Francesco Lavecchia: Welcome to Morningstar. I am Francesco Lavecchia and today is with me Jelena Sokolova. Jelena is a Morningstar equity analyst and our expert on the luxury goods sector and thank you for being with us today.
The first thing I'd like to ask is, what stock do we take for the luxury sector in 2022 in terms of corporate earnings and what are your expectations for this year?
Jelena Sokolova: Hi Francesco and thank you for your invitation. Despite the more difficult macroeconomic conditions, the lockdowns in China and a very challenging benchmark like 2021, demand for luxury goods held up surprisingly well in 2022, mainly supported by developed markets. For 2023, I expect demand from developed markets to slow significantly, while demand from China, while still below pre-pandemic levels, should be a key growth driver for the industry.
Lavecchia: Speaking of the future of the industry, last week during our special week on the technology sector, we also talked about the live stream. Can you tell us about this new trend and which companies do you think are best positioned to benefit not only from the live stream, but new technologies in general?
Sokolova: Some brands are engaged in live streaming thanks to partnerships with third-party providers, as they do not have the option to do it internally, and they are also exploring the tool of games and NFTs as a new way to attract young digital consumers. However, I would say that the leadership in the industry is very unstable from this point of view due to the rapid changes in technology. In addition, as the two years since the economy reopened after the pandemic has shown, brick-and-mortar stores remain the primary marketing and sales channel for these businesses.
Lavecchia: The last question concerns the Italian companies we cover: Ferragamo, Moncler and Prada. All three had a bad year in 2022 in terms of equity performance, but they are still overvalued relative to our fair value. What are your expectations of these three companies and why do you think they have become expensive?
Sokolova: At the end of 2021, most luxury sector stocks were significantly overvalued compared to our expectations on corporate fundamentals, as we did not envision a rapid recovery for the sector then, which was then driven by one-time factors such as post-pandemic savings that was hoarded during the lockdown period, when people couldn't travel and eat out, and the gains in the financial markets.
Equities in this sector showed some profit-taking in 2022, but market valuations rose again towards the end of the year on expectations that demand in China would recover. Some equities are already getting expensive and investors are currently underestimating the risks that could dampen growth, such as shrinking demand in developed countries due to high inflation and depreciation of assets in the financial markets over the past year, as well as the potential vulnerability of demand recovery and store reopening in China.
Lavecchia: Thank you Jelena for your time. For Morningstar, I'm Francesco Lavecchia.
