Donald Trump’s U.S. presidential election victory should be negative for European luxury stocks but support providers of accessible fashion, RBC Capital Markets said today in a report.
“Volatility will almost certainly increase; the fundamental reality is that we don’t know what kind of U.S. we are now faced with given the lack of policy detail through the campaign,” it said.
“Potential outcomes range from a pro-growth conservatism which could ultimately be positive for markets to a more nationalist protectionist outlook which largely would not be. Only time will tell. We expect valuation discrepancies will open up in the meantime,” the report added.
Global markets tumbled in the wake of Trump’s upset win. European shares fell at the open, led by the FTSE MIB, which tumbled 2.3 percent at 9.50 a.m. CET, followed by Germany’s DAX, down 2.1 percent, France’s CAC 40, which lost 1.9 percent, and London’s FTSE index, which fell 0.6 percent.
In the longer term, the Trump victory is expected to boost the U.S. dollar’s strength against the British pound and the euro, which would benefit consumer staples the most and luxury the least, with retail somewhere in between, according to RBC.
It forecast that staple names with strong balance sheets, such as high street chains Inditex and H&M, will outperform, while stocks with heavy exposure to sourcing in U.S. dollars will be vulnerable to a sell off. The latter category includes U.K. retailers Sports Direct, Next, Debenhams and Marks & Spencer.
“Luxury goods as a concept is the notion of ‘feel-good purchases’ and the Trump victory and implied risk-off equity markets increases uncertainty and lowers confidence in the global/U.S. economic outlook. This is therefore negative for European luxury stocks at least in the short term,” RBC said.
“Longer term, our strategists believe the Trump victory will be USD positive – which is helpful for the European luxury sector given positive revenue translation [according to our estimates a 10 percent USD appreciation would drive nearly 20 percent EBIT upgrades on average],” it added.
A stronger dollar would continued to restrict tourist spending in states such as California, New York and Florida, likely benefiting other destinations such as the United Kingdom, it concluded.