There is a sector that has always overcome challenges and crises and emerged stronger and more profitable. We are talking about fashion and luxury, one of the most dynamic and resistant sectors in the world. Thanks to Cash Collect Certificates, financial products capable of reconciling the possibility of growth in value and the protection of one’s portfolio in various structures, it is possible to take a position on the fashion and luxury sector by focusing on a basket product containing the best securities in the sector.
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The importance of China in the luxury market
The Covid-19 pandemic has brought unprecedented changes to the sector, forcing it to make major adaptations and transformations. From 2019 to 2023, as Gam explains, the luxury market underwent a strong geographical and national shift. China has doubled its share of the industry, rising from 14% to 28%, while Asia as a whole increased its share from 28% to 47%, becoming the most important region for luxury brands. Europe, however, saw its share drop from 49% to 30%, mainly due to the decline in tourism and travel caused by Covid-19 and stricter border controls by the Chinese authorities.
Chinese consumers are the main drivers of the luxury sector and experts estimate that they represent 36 to 38 percent of global sales this yearup from 34% in 2019. According to Bain’s more conservative forecast, Chinese consumers are expected to further cement their status as the dominant nationality for luxury, growing to account for 38%-40% of global purchases by 2030. However , now buy more luxury goods locally, as traveling abroad is becoming more expensive and difficult.
In 2019, Chinese consumers accounted for 34% of luxury sales, but geographically China only accounted for 14%. This is because they spent in other countries, especially in Europe, Japan, South Korea and Hawaii. As the trend shifts towards greater focus on the domestic market, it is estimated that China geographically will account for 28% of global luxury sales in 2023. The luxury sector is facing a new reality, in which Asia matters more than ever and Europe less and less. According to data from Statista, this year Asian consumers, including Chinese and other nationalities, represent around 55% of the luxury sector, while European consumers only 15%.
The new strategy of luxury brands
The luxury sector has changed a lot since the global financial crisis of 2007-2008. It is now bigger, more profitable, more resilient and, as mentioned, more dependent on the Asian market, especially Chinese consumers, who are the most important and influential customers for luxury brands. There Generation Z will soon be the largest luxury buyers, but first he needs to know the brand. As Gam explains, thanks to the MEDALS strategy (acronym for music, entertainment, digital, arts, lifestyle and sports), the best luxury brands reach new, younger customers by focusing on these different categories. This is the so-called “premiumisation of everything” phenomenon: luxury brands are becoming involved in categories and areas they would never have been involved in 10 years ago, and these have the potential to be very accretive revenue opportunities.
The luxury sector is facing a new reality in the post-Covid era, where brands’ growth, margins and innovation will determine their success. Luxury spending in China, the largest market, is expected to grow 5% this year. The keystone is, according to Gam, revenue growth and increased market share, which should allow margins to be maintained. Stronger brands, such as Kering, Tapestry and Richemont, could benefit more from the growth of the luxury sector, as they have an advantage in quality, brand identity, customer experience and innovation.
Cash Collect with airbag effect and callability
An alternative way to take a position on the fashion and luxury sector is to use new ones Airbag Memory Cash Collect Callable Certificates recently issued by BNP Paribas on the SeDeX (MTF) of the Italian Stock Exchange. These products provide potential monthly premiums with memory effect ranging between 0.60% (7.20% pa) and 1.45% (17.40% pa) of the notional amount even in the case of negative performance of the underlyings provided the price of the worst of the underlyings is equal to or higher than the premium barrier level (60% or 50% of the initial value of the underlyings).
What characterizes this emission is theairbag effect which allows you to contain the negative effects of any declines in the shares that make up the basket beyond the airbag level (which varies from 50% to 60% of the initial value) and to limit losses. Furthermore, an important innovation is added: these investment products are characterized by possibility of receiving an early refund of the Certificate at 100% of the notional amount (100 euros) starting from the ninth month: from 21 September 2024, in fact, on a monthly basis, the Issuer has the right to call the Certificate early by giving investors at least 3 working days’ notice.
The new Certificates therefore combine the Airbag effect, which offers additional protection to investors in the event of declines in stock markets, with the efficiency of callability, which is particularly interesting in the current market phase. The 18 new products have as underlying a basket made up of Italian, European and American shares. The baskets are built to allow the investor to take a position through a single instrument on some of the most important Italian and international financial and industrial companies, following a thematic approach and allowing you to bet on securities from different economic sectors.
The Certificate on the luxury giants
Investors can consider Memory Cash Collect Callable Airbags as a solution to diversify their portfolio by investing in stocks in the most interesting sectors ahead of 2024, such as the fashion and luxury sector. For example, the Certificate on Kering, Tapestry e Richemont (ISIN NLBNPIT1XWK6) pays a monthly premium of 0.84 euros per Certificate (potential 10.08% per annum) if the value of all three shares is greater than or equal to 60% of their initial value (plus any unpaid premiums previously thanks to the memory effect), while if the value of one of the three securities is less than 60% of the initial value, the Certificate does not pay the premium and is postponed to the next valuation date. Starting from the ninth month (September 2024), the Issuer has the possibility of exercising the option of early repayment: in this case the Certificate expires early and pays, in addition to the monthly premium (0.84 euros), the notional amount ( 100 euros).
If this scenario does not occur during the life of the Certificate, expiring (21 December 2026), if the price of all the securities that make up the basket is greater than or equal to the airbag level (60% of the initial value), the Certificate expires and pays, in addition to the monthly premium (0.84 euros), the the notional amount (100 euros) and any previously unpaid premiums, thanks to the memory effect. Otherwise, if the price of at least one of the underlyings is lower than the airbag level (60% of the initial value), the Certificate expires and pays an amount commensurate with the value of the worst among Kering, Tapestry and Richemont, multiplied by the airbag factor, with resulting in partial or total loss of the notional amount.
What does the airbag consist of? This mechanism allows you to contain the negative effects of any reductions of the shares that make up the basket beyond the airbag level and to limit, in this scenario, the losses compared to an investment in a classic Cash Collect certificate on shares. In detail, if, at maturity, the price of the share with the worst performance in the basket is lower than the airbag level, the airbag effect is activated and the investor receives an amount commensurate with the value of that share at maturity multiplied by the airbag factor. The Airbag Factor is equal to 1.6667 when the Airbag Level is equal to 60% of the initial value of the underlying shares. For example, assuming an airbag factor equal to 1.6667 and a value of the share with the worst performance of the basket equal to 40%, the reimbursement upon maturity of the Certificate will be equal to 66.67 euros or 40 euros multiplied by 1.6667 .
In the table below, the green fields show the scenarios in which the Certificate, thanks to the airbag effect, has a performance, albeit negative, better than a Cash Collect without the airbag effect, i.e. direct investment in the underlying asset. The orange fields show the scenario in which the performance of an Airbag Cash Collect and the performance of a Cash Collect without the airbag effect are equivalent. The reimbursement value shown refers, as in our case, to an airbag level equal to 60% of the initial value.
Analysts’ opinions on the stocks in the basket
The consensus collected by Bloomberg on the three stocks in the basket, which we report in the table above, is substantially positive. Most analysts who follow Tapestry and Richemont have a buy recommendation and only a minority suggest keeping the shares in their portfolio (hold), while only one expert says to sell Tapestry. On Kering, however, more than half of the analysts recommend hold, while the remainder greatly prefer buy rather than sell. Furthermore, the average target price indicates that these three stocks currently appear under-priced and from which analysts expect potential upside within the next 12 months.
This makes the underlyings of the basket suitable for strategies with an Airbag Memory Cash Collect Callable Certificate, i.e. for those who have a lateral or moderately bullish view of a specific sector (in this case the fashion and luxury sector) to obtain a interesting yield at the time of Callability at the discretion of the Issuer or at the end of the product’s life (December 2026).