How to Spot a Global Recession (Before It's Too Late)

If I was to pull up earnings of Ferrari, Hermès, and Louis Vuitton, you might think that I was about to lecture you on, I don't know, the consumer, the upper class, people with more money than sense. But the reality of what's actually happening behind the headlines has implications for your portfolio. And in this video, I'm going to show you the one indicator that I reliably used throughout my time managing 8-figure funds as a pro To not only anticipate what's going on in this particular sector, but how it can impact the global economy, the global stock market, and therefore a multitude of positions that you're holding right now. Let's get into it. Ferrari has been under pressure and it just saw a big beat. So it seems that it's, if you pardon the pun, perhaps turned a corner now. And that's because a lot of the bad news, a lot of the pessimism Apparently was priced in. Now, for those of you that might have seen some of my videos from around the beginning of the year, I actually called this stock Ferrari as my top pick for the year. It has very, very strong fundamentals, as you would expect of such an established brand. That in itself is something of an economic moat, to use a Buffettism. This at the bottom is the valuation. So where it's highlighted in green, You can see when the stock theoretically was trading below fair value. The reasons for them kind of—I say them—the reasons for the market investors getting a bit pissed off with Ferrari, if I'm honest, was due to the direction of the kinds of cars that they're releasing. Who wants to spend? Evidently, enough people fry to do it. But who wants to spend €550,000, probably before extras, which probably add just as much in the case of bloody Ferrari? To an electric four-door or four-seater Ferrari, the Luce or Luce that many people have compared to this Nissan Leaf, which I actually think is quite a handsome car. Maybe I've spent too long in in Asia. Perhaps I'm going Japanese, but I actually think that's pretty cool. These cars go shows that I've been out of the game now for a while in in Bali. Nonetheless, just rest assured that that is the dream. There we go. Brand value, brand appeal. That is a Roma Spider, and it's some kind of little slight limited edition one. Just means you get nice little red head crests and— head crests? Crests in the headrests and, uh, bronze alloys, or Aurum as they'd call them, which I'm rather partial to in matte. Anyway, getting back to it, Ferrari's turned a corner, and in order to understand where this is going, I want to now show you the contrast with 2 other luxury heavyweights. Because they're seeing a completely different shift. Now, similar to Ferrari, when you think of the 1% and you think of the things that they buy or the big brands, Hermès, the maker of the $10,000+ Birkin bags, is next up. Very similar business models in terms of artificial scarcity, requiring a long spend history to get up the list to be able to buy. What you really want, which is not a Ferrari bloody Luce, and it works. Hermes missed. I think it was on revenue in the previous semiannual report. It's harder to say than quarter, isn't it? Given it's European, and it's missed again this half, and that's pretty much dare I say unprecedented. And amongst the reasons for it, it was really twofold. Travel disruption as a result of war. Oil prices, of course, spiked. That had an impact throughout the economy, especially for airlines, which to some extent affected consumer spending or did affect consumer spending, and to some extent affected perhaps some demand for Hermès, but to a much lesser extent than the aspirational luxury buyer. That makes up a greater portion of LVMH's stable of brands. Talking things, I think they're even on Gucci now, but things like Tom Ford, Veuve Clicquot Champagne, obviously Moët, a bunch of fragrances, Tiffany, for example. They're so much more broadly exposed to the middle class compared to Hermès. It's a different kettle of fish, but nonetheless, they will have still faced a little bit of headwind from that. But the main thing Besides the war and the unfolding cost squeeze and the travel disruption. So remember, 1%ers are flying around the world. Every city they go into, there's an Hermès boutique and they're going in, they're constantly spending money. If they're not moving around and traveling, they're not moving around and spending in department stores and in boutiques, which is where luxury in general takes a hit. And especially in Asia, with Asian consumers accounting for somewhere between 40 to 50% of Hermès's overall consumer base, its sales basically. And it's around a third for LVMH. So LVMH is more exposed to the Western consumer. So this actually brings us to the indicator. This indicator is known as the Credit Impulse Index, and it's compiled by Bloomberg, which makes it really rare to get a hold of unless you have a terminal. So let me explain what it's doing, how we interpret it, and what it means for your portfolio. When credit is available, when it's plentiful, businesses invest, consumers spend, and there's a multiplier effect for the economy which produces growth. If we're saying that things peaked around July of Last year, it peaked in September. You know, a matter of weeks later, and it's come off. If we compare the performance against the MSCI World Index, you can see even more clearly the underperformance of China compared to global stocks. What does this mean for your portfolio? Remember that this tends to have about a 12-month lead. It peaked a year ago, 12 months ago. So. I think we're only just seeing, potentially only just seeing the start of the impact of China slowing, hitting LVMH, now also impacting Hermès, which if I just pull up the fundamentals very quickly to compare the two, is the superior company. Hermès is in blue, Louis Vuitton's in orange. We'll just call it Hermès. Hermès massively when it comes to return on capital, which is one of the most important attributes for long-term share price appreciation compounding. Hermès in terms of the free cash flow margin, which is the level of profitability that can be then recycled and reinvested using that return on capital flywheel. What is a return on capital? What is a return on capital flywheel, James? Return on capital is essentially the amount of profit that a company can make by reinvesting $1, or in this case, €1 back into the business, as opposed to paying that out to shareholders in the form of a dividend or in a roundabout way, buying back the stock. And then essentially it's a buyback yield that people benefit from. So the TLDR is dividends are not a desirable thing for businesses that have a very high and hopefully stable return on invested capital, as Hermès certainly does. And for many years, LVMH also had a reasonable return on capital. It was certainly pretty stable. And that is why share prices go brrr, as you used to say, why they go up in a 45-degree line. That's the definition of a compounder. Louboutin has greater revenues because it's a much bigger group. Hermès is like a, I suppose, like a handcrafted artisan of savoir-faire or whatever, with its Twillies and its bags and whatever else. Anyway, may have larger revenues, but they're growing at 7 or 8%, whereas Hermès, still big and growing at 12 to 13% consistently. Louboutin began to slow, and maybe Hermès is beginning to plateau. So it'll be interesting to see if an upswing in China can propel it again. Payout ratio. Well, that's what I talked about earlier. You don't want a high payout ratio if these companies could otherwise invest at high rates of return. They could reinvest the profits. This is really interesting. The free cash flow yield, which is the inverse of the price to cash flow, like the inverse of the price to earnings you might look at otherwise, is about 5%. So that does look pretty attractive now. It's been heavily discounted. If you consider the US 10-year, what's the yield there currently? 4.7. It's a little bit greater than that. So this is how I still think, and what I learned as a fund manager is when you're investing for 5 or 10 years plus, you are perhaps comparing a stock like Louis Vuitton, for example, or Hermès to otherwise the risk-free rate, the safety of bonds, which in theory can never default or go wrong. In theory, inflation is obviously the risk. So if you could earn 4.7%, in this case, risk-free over 10 years, and you're otherwise prepared, to own a stock for 10 years, which for your pension, I certainly am for a lot longer than that, then the earnings power of Louis Vuitton currently, where are we? Should see, well, it has earnings power of over 5%. So that's the distribution that we should expect to receive as shareholders simply as like the holding return, if you like, before any share price performance. Now for Hermès, it's down at 2.6%, but you have all of that growth potential. And the reason that's different to otherwise 4.7% on a 10-year is because there is no growth in bonds. And I would argue that Hermès has sufficient earnings power as we saw in the margin, the profit margins earlier and the return on capital, to increase prices, which it does anyway, in excess of inflation. I would have it on my watch list if I didn't already own it. And as soon as this begins to turn up again or show signs of bottoming out, I'd be very quick to buy it. When it comes to Ferrari, perhaps this is a relative haven within luxury. If you were looking to buy a brand that you can sleep at night owning, Come what may, people are still going to want a Ferrari in 5 years, in 10 years, and probably a lot longer. It's Ferrari. So opportunities to add this stock when it's under near-term pressures, it's just seemingly is going through at the moment, and perhaps it's just come out the other side of. I think there's an opportunity here, and it's for that reason that Hermès and Ferrari are companies that I would own. And Louis Vuitton is the weakest of the bunch, and I certainly wouldn't fuck with it for as long as China is slowing. So I hope you found that useful. If you have, then check out this video next, which YouTube thinks you're going to love. Let me know in the comments if there's something that you'd like me to take a look at in the next video that hopefully I can shed some light on. See you in the next one.