☀️☕️ Young and Rich: Luxury booming despite everything

25 November 2022

Happy Friday! 

📊 IN THE MARKETS

• Rate hikes, Rate cuts in Turkey and China, China property support

📝 FOCUS

• Breaking The HK Dollar Peg?

• Young and Rich: Luxury booming despite everything

📊 IN THE MARKETS

While the US was shut, European markets were firm on reports that German business confidence was rebounding in November. Positive news on the margin, but most forecasters are still expecting a significant recession in the next few quarters.

Sweden's central bank increased borrowing costs by 0.75% to 2.5%, its highest interest rate since 2008, saying,

That said, the Swedes were among the last to raise rates above zero back in May! Meanwhile, The South African Reserve Bank hiked a third consecutive 0.75% to push its benchmark rate to 7% on inflation of 7.6% in October. The target inflation rate is 3-6%, unlike many Western central banks like the Fed, BoE and ECB with a 2% target. 

Turkey has cut interest rates once again, by another 1.5% to 9%, despite annual inflation of more than 85% (!!) as President Recep Tayyip Erdoğan continues on his unconventional plan to grow and export his way out of inflationary pain, perhaps with an eye on next year’s elections. The country of 85 million currently has the world's 22nd largest economy, on par with Taiwan and Switzerland and quite a lot bigger than, for example, Sweden and South Africa. (Insert your own lame joke here about turkeys and Thanksgiving in the US.) But Turkey's not the only large economy to be considering lowering interest rates. 

Hong Kong stocks rose for a second day on signals from officials that China will lower borrowing costs soon, too. This comes against a backdrop of record-high Covid-19 infections and cities nationwide imposing localised lockdowns, mass testing and other curbs that continue to fuel frustration and suppress economic activity in the world's 2nd largest economy. Unlike the previous peak in April which led to Shanghai getting locked down for two months, the cases are in multiple, far-flung locations. It is fear of the virus and--perhaps more--the fear of being locked down that is keeping consumers subdued and precautionary savings high, and lower interest rates may not overcome that fear.

📝 FOCUS

Breaking The HK Dollar Peg

Bill Ackman, a high-profile billionaire hedge fund manager, announced on (of course) Twitter that he has a big bet on that the HK Dollar peg🎓 will break and that it will fall against the US Dollar. He was actually responding to a Bloomberg opinion piece and probably just using it to bring a few more investors onto his side of the trade. “The peg no longer makes sense for Hong Kong and it is only a matter of time before it breaks.”

Every now and again, hedge fund managers put on a trade against the HK Dollar, which has been pegged in a tight band between HK$7.75 and HK$7.85 per US Dollar since 1983. It tends to face pressure every time US interest rates go up (which is what the Fed has been doing very aggressively this year.) The Fed changes US interest rates based on what is happening to US prices and US employment trends, which are often out of step with HK's increasingly China-driven economy and can lead to bubbles and recessions. Not quite in the "feature-not-a-bug" category, but it's how the system was designed.

The Linked Exchange Rate System (LERS or "Peg") was put in place in 1983 to shore up confidence in HK's currency and economy as a whole ahead of negotiations to return the colony to China.

​​The Hong Kong Monetary Authority maintains the peg by moving interest rates exactly in line with the Fed and through buying and selling directly in the currency market. Because of the currency board system, where the HKMA has more in underlying US$ reserves than the amount of HK$ in issue, this will affect how much money there is in Hong Kong and drive local rates up (or down) until trader inflows (or outflows) stabilise the currency. At over US$400 billion, the HKMA has among the largest foreign exchange reserves in the world.

Kyle Bass, who made US$500 million in the subprime / Lehman Crisis, attempted it in 2019 and George Soros, who made double that as "The Man who Broke the Bank of England" in 1992, tried it in 1998, the year after HK's handover to China. Both ultimately failed (though Bass seems to now have a fund dedicated to that one trade.)

Young and Rich: Luxury booming despite everything

The global luxury market continues to grow despite the cost of living, geopolitical and climate crises engulfing the world on top of the ongoing Covid restrictions.

Just last week we noted that "Well-known but faded American department store chain Macy's popped 15% on October quarter earnings driven by strong luxury sales"

A recent study by Bain & Co. projects US$1.4 trillion in luxury sales this year, growing 21% from 2021. 95% of luxury brands have reported positive growth in 2022. And where is all this growth coming from? Gen Y and Gen Z accounted for the entire growth of the global luxury market in 2022. Gen Z and Gen Alpha luxury spending is expected to grow three times faster than other cohorts.

Geographically, Bain expects Chinese consumers to make up 40% of the global luxury market by 2030. Its previous forecast of 50% by 2025 was changed not because China is weaker but because of better growth in the US and Europe as well as newer markets including Southeast Asia and South Asia.

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