WHY DOES RICHEMONT STAY SO STRONG?

An interesting perspective from HSBC :

Enjoy a great piece of Analysis :


"It was the Diwali holiday yesterday and I left you all with a quiz on Monday so I will start there.


The quiz was: In many countries, gift giving often means money in a brown

envelop. Why is it that in China people give expensive watches instead? The

answer was actually told to me by a watch retailer who shall remain nameless.

In Singapore, the largest currency denomination is $10,000 but you can

actually find the $1,000 (~US$820) quite easily. In HK, the largest

denomination is HK$1,000 (~$128). In China, the largest denomination is

RMB100 (~US$16) so if you want to put a reasonable amount in a brown

envelop, it has to be a pretty big one. Simple practical reason explaining

why about 1 in 3 watches are bought for gift giving purposes. I will make a

case for China related to gift giving. Most China bulls have been smacked

into submission including my own China strategist Steven Sun (though my

Asian strategist Herald van der Linde is overweight on China). I was in a

discussion with Nouriel Roubini during the Salt conference in Singapore and

he was adamant that China will hard-land within the next 2 years. Why then

am I more sanguine on China despite my caution on other equity markets? I

think that the consensus opinion has missed out on just how important gift

giving is in China. There is even a term for it: 关系。The leadership

transition currently underway in China does not just involve the top

leadership. It also involves all the provincial and state governments. In

China, there is an idiom that says that a new Emperor brings a new court of

Ministers (一潮君子，一潮臣). It's no wonder then that gift giving has

slowed massively (if not stopped entirely) as no one is sure if the person

at the other side of the table will be there in a couple of months. As the

situation settles and as the new powers ascend, there will be a pent up

demand of people trying to ingratiate themselves with the new

powers-that-be. This will in fact result in a spike in conspicuous

consumption which will then filter through the system through the multiplier

effect (the Rolex salesperson will get his commission again with which he

can now buy something else and so on). My guess is that sales of luxury

products will be much higher than expected in Q1 next year and this will

once again cause analysts to once again extrapolate too much on the upside.

Am happy to be bullish on China here. "



Take it easy

Steven

Steven Morris Chartered Accountant (SA)




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