Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Jelena Sokolova. She is an equity analyst at Morningstar in Amsterdam. Hello.

Jelena Sokolova: Hi, Holly. Thanks for having me.

Black: So, Jelena, you focus on the luxury sector. And while maybe this time last year that was thriving, it's been hit pretty hard in the Covid-19 pandemic. What's been happening this year for this sector?

Sokolova: Yeah. So, in the first half of the year, the sector has been hit really hard. We have seen the companies, their revenue declines from 25 per cent to 50 per cent among the companies we cover in the first half of the year. Obviously, that was extremely affected by the store closures in the second quarter. Now the stores have mostly been reopened. However, the travel demand is still a drag. Travel accounts from 20 per cent to 40 per cent of the luxury company revenue and the international travel is still being very much disrupted. However, in the third quarter, there is a sign of recovery already as some companies are starting to report numbers that have growth year-on-year.

Black: So, what are the long-term implications of this? Is it going to have a long-term effect, or will we expect a bounce back quickly?

Sokolova: I do expect a bounce back actually, as first of all, we don't expect a long-term big hit to the GDP growth as a result of the pandemic. As you know, luxury goods sector is quite correlated with the GDP growth and wealth formation. But also, from luxury consumer perspective, I think that luxury consumer looks extremely healthy at the moment.

First of all, there is Chinese consumer, more than one-third of the company's revenue. China seems to have weathered this crisis better than most other countries and the growth drivers such as high wage employment is still intact. Then, the incomes for high earning people, luxury consumers, have been holding up as well quite well. The unemployment among the highest educated and higher income people in the US has been the lowest. High wage professions are usually well-positioned to be done from home. And finally, from travels perspective, obviously, travel hurts the industry as well as people buy luxury goods while traveling. But on the other hand side, luxury hospitality and fine dining industries are around $250 billion industry according to Bain, and that has been vastly curtailed during the pandemic. So, people actually have more money to spend on luxury goods if they choose so.

Black: Okay. So, with all that in mind, I mean, we know that at times of uncertainty for investors who can be brave and think long-term, there are usually some opportunities. Which stocks do you particularly like at the moment?

Sokolova: There are quite not a big number of opportunities left, but we still have some picks that we like. For instance, we like wide moat Richemont. It's a 4-Star rated name, around 25 per cent discount to our fair value estimate, very strong jewelry franchise. We also like its watch making peer Swatch trading at 30 per cent discount to our fair value also in 4-Star territory. Then we also like Hugo Boss. It's one of the most undervalued names in our coverage at the moment. It's in 5-Star territory with more than 100 per cent upside to our fair value estimate. And we think that markets are excessively pessimistic on the name given its still very strong position in mass premium apparel with 10 per cent market share globally and menswear is twice as brand loyal actually as womenswear in terms of apparel. And finally, we also like Dufry, it's also one more sort of deep value play in the challenged travel retail market. Obviously, the near-term visibility remains very low; however, the company has secured plentiful liquidity, which should suffice it for many, many months of practically zero revenue and also, it is a market leader, so it should benefit from the recovery in travel which we expect to happen sooner or later.

Black: Fantastic. Jelena, thank you so much for your time. For Morningstar, I'm Holly Black.