by Emmeran Eder, Euro on Sunday
Ferrari has tripled its profit in the second quarter. The sports car manufacturer sold almost twice as many of its speedsters as in the same period last year. The demand for the expensive cars remains high – despite an imminent recession.
This is not only the case with Ferraris, but also with other luxury goods. The world’s largest luxury goods group LVMH from France also recently reported excellent figures. The company sells a wide range of luxury goods, from wine to leather goods, clothing, jewelry, watches and cosmetics.
After a brief dip during the pandemic, the industry has bounced back quickly. According to data provider Statista, global sales of luxury products will climb from EUR 206.5 billion in 2014 to almost EUR 280 billion this year. According to forecasts, a market volume of 347 billion euros should be reached by 2027. This corresponds to annual sales growth of 4.5 percent. The luxury industry benefits from the fact that the rich are constantly increasing their wealth. According to calculations by the consulting company Capgemini, it rose by eight percent in the previous year compared to 2020 to a record value of 82 trillion euros.
At the same time, the world’s dollar millionaire club grew by 7.8 percent to 22.5 million people. “Things are steadily improving when we review the past few years,” says Capgemini expert Klaus-Georg Meyer, looking at the overall development.
Of course, the luxury sector benefits from this, as these are its customers. The world’s millionaires control almost half of the global private wealth. In Asia and China in particular, the number of wealthy people is increasing sharply, while growth in Europe and North America is only slight.
Chinese love expensive brands
Around a third of customers come from China, since the middle class also loves to buy expensive brand labels there. And the middle class in the Middle Kingdom is constantly growing as the country rises to become an economic world power.
Therefore, the first lockdown in China in the first quarter of 2020 hit the industry hard. On the other hand, the luxury industry coped better with the recent shutdown in Shanghai and other Chinese cities. The corporations have learned something new and have vigorously expanded and boosted online sales, which had previously been almost idle. While this was still responsible for a good twelve percent of sales globally in 2017, it is now 20.8 percent. According to Statista, the online share should be 26 percent by 2026. In addition, many branches were opened in China, while the Chinese previously mostly flew to Europe or the Middle East to do luxury shopping.
As a result of Corona, the luxury industry is now more crisis-resistant than before the pandemic. The importance of digital distribution benefits all the big players in the sector. They can exploit their economies of scale because they invest more resources in e-commerce and maintaining social media channels. Small and medium-sized companies can hardly afford this, which is why they are no longer able to compete with the industry giants to the same extent as they used to. Therefore, there will probably be more mergers and acquisitions in the future, which will have a price-driving effect.
Rarity is an important selling point
The luxury companies are also expanding their range of products. Hermès and Gucci expand the cosmetics business, Fendi, known for its handbags, sells high-priced furniture. “This diversification allows the companies to attract new consumers and recruit young customers with lower prices,” says Swetha Ramachandran, manager of the GAM Luxury Brands Fund. However, she warns that luxury companies must be careful not to lose their authenticity and exclusivity. Because the rarity of the products represents a decisive incentive to buy.
Probably also for the Americans, who spent a lot of money on luxury goods this year and are the main driver in this segment. They could now be replaced by the Chinese, who are pouring back into the branches of LVMH and Co after the end of the lockdown.
Protection against inflation
In the medium and long term, the sector will also benefit from the trend towards feminism. More and more women are pushing into well-paid managerial jobs and earning well. Women buy more luxury goods than men and often manage the household budget. “The luxury industry benefits from the female element,” says Armin Zinser, a consultant at the French asset manager Prévoir Asset Management. He sees another advantage of luxury goods. In times of high price increases, these are also an instrument for many customers to hedge against inflation. Because many luxury goods increase in value over time, so they are also an investment. This applies, for example, to some handbags or watches.
It is also positive for investors that they can benefit from the growth opportunities in emerging markets with luxury stocks, as the number of wealthy people there is increasing. At the same time, investors acquire companies with European corporate governance principles, since the majority of the companies are based in France, Italy or Switzerland.
High rating
Just like the French luxury goods group Hermès, which was able to increase its sales by 30 percent in the first half of the year. Business is also great for most of the other industry giants. But that’s already priced into the shares. Industry stocks are highly valued, with price-to-earnings (P/E) ratios between 25 and 50 for 2023 being the norm. Hermès has a PER of 49, Ferrari of 43.
Investors in this sector can hardly make any bargains anymore. Luxury stocks have risen sharply in the past two months after a correction in the wake of the general market weakness. However, they have not yet reached their highs of 2021.
Mixing makes sense
Despite the high valuation, investors should add the sector to their portfolio and view luxury stocks more as a long-term investment. This is supported by the crisis resistance, the consistently high growth, the participation in the economic upswing in the emerging countries, the high margins and the associated strong profits in the segment. They are also bubbling up because the luxury goods manufacturers can pass on the increased costs caused by inflation to their customers.
Investors can cover the segment broadly with funds or ETFs. The other possibility is to have industry heavyweights in your portfolio that are not cheaply valued, but are at least reasonably priced. These include the brand conglomerate and the market leader LVMH and Kering, also a sector giant (see investor info).
INVESTOR INFO
Amundi’s S&P Global Luxury ETF includes the 80 most important companies involved in the production, distribution and services of luxury goods worldwide. The largest positions are LVMH, Richemont, Hermès, Estée Lauder, Kering and Tesla. Europe dominates regionally with a 53 percent share, ahead of the USA with 40 percent weight. The rest comes from Asia. There is no currency hedging. Over a three-year period, the ETF has outperformed the active funds in this segment.
The world’s leading luxury conglomerate offers an extensive range of noble goods. The French include brands such as Louis Vuitton, Dior and Fendi. In the first half of the year, operating profit rose by 34 percent to 10.2 billion euros and was well above expectations. The growth was primarily driven by the “Fashion and Leather Goods” division. The valuation is still reasonable with a P/E of 22 for 2023.
Kering
Well-known brands of the French company are Yves Saint Laurent, Bottega Veneta and above all Gucci. In the first half of the year, sales climbed by 23 percent to almost ten billion euros. Nevertheless, the share is weakening, since the most important label Gucci recently fell short of expectations. With a P/E ratio of 15 for 2023, the group is valued favorably in a sector comparison. In the short term, however, there is a risk of descent from the Stoxx 50 index due to the correction.
Image credits: LVMH/Christopher Anderson, August_0802 / Shutterstock.com
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