To start this note with a quote from the great Oscar Wilde,
“Let me be surrounded by luxury, I can do without the necessities!”
Watching network news over the weekend (for the first time in many years), I was reminded of Wilde’s quote, as Channel Nine gave me whiplash between messages of “the world is frightening, take shelter in your homes” and “behold the latest leather goods line from XYZ brand”.
In recent notes we’ve touched on the market outlook that people are getting wealthier, not disregarding the incentives by governments to spend through various stimulus measures, and that the world is still uncertain and worrisome.
Although we are doing better now than we were this time last year, we still live in a time where consumer psychology and preferences have dramatically changed as a result of all the ways this pandemic has impacted our lives.
Considering this, what do we, as irrational beings, tend to do when we have money and need comfort? Well, to feature another great quote, “we buy things we don’t need”.
The Market for Luxury Goods/Brands
If you look at the pure economic definition of a luxury good, they are goods which account for a greater proportion of spending as income rises.
In other words, as we make more money, we want to spend increasingly larger parts of our paycheck on certain luxury items – from a better TV, to a nicer bag, to that new suit.
The other side to this equation is that as if our fixed/necessary costs decrease, we have more funds to spend on these items, for instance, if you no longer spend hundreds in petrol costs because you work from home, that’s hundreds that could go towards a lovely set of cigars instead.
The growth of global luxury brands has played into this particular definition nicely, buoyed particularly by the growing wealth and spending of Chinese consumers, but also by the growing liquidity amongst ‘Millennial’ consumers who were delivered the dual benefit of stimulus measures and capital gains from financial markets – Bain & Co. estimated earlier this year that 70% of luxury purchases were from Millennials.
This is not even mentioning the growth of luxury brands in the e-commerce space. In a report by MoneyWeek, it was reported than in 2015, luxury shopping online accounted for 7% of sales, growing to 12% in 2019 and as of December 2020, it is estimated to represent 23% of all e-commerce transactions with the potential to grow to over 30% by 2025.
The S&P Global Luxury Brand Index (white line) has recovered even more strongly from the pandemic than the S&P 500 (blue line) itself, outperforming by almost 45% since March 2020.
As mentioned previously, this is still not a post-pandemic situation yet – so either the market is pricing in expected earnings well in advance of the global economy fully re-opening, or this chart has not yet seen the bullish effect of pent up global demand finally being released upon the sector.
Analyst from Deutsche Bank have called the current market environment for luxury brands similar to that of the “roaring 20s”, appropriately enough – an improving economic outlook after a collapse, a euphoric stock market, rising consumer confidence. If that’s the case, maybe now would be a good time to invest in tweed suits and feather boas.
Buying the Finest
Buying a listed luxury brand is often like buying a portfolio in itself, owning multiple brands diversified across geographies and market sectors – you are buying the value of the name, just as much as you are buying the sales volume of the underlying products.
With that being said, the following are some investible ways to own a small part of some of the world’s most recognised brands, companies which position themselves as “need to own” rather than “want to own”:
Louis Vuitton Moet Hennessy (MC:EPA)
LVMH has become a household name for its business enterprise as much as its iconic Damier pattern.
It is the world’s largest luxury company, with a current market cap of 334 billion Euros, and boasting such names in its stable as Givenchy, Bulgari, Moët & Chandon and Christian Dior. This puts the company across high-end liquor, haute couture clothing all the way through to luxury jewellery and accessories.
Daimler AG (DAI:ETR)
For those who are more into fast cars and excitement, the growth in luxury car brands has been evident over the last 12-18 months, particularly out of Mainland China. Daimler earns special mention here for reporting a 23% growth in sales for Mainland China in 2020 despite the pandemic, reported to have offset losses seen in Europe and North America over the same period – so a geographic dependence, but in a growing geography.
Amundi S&P Global Luxury ETF (GLUX:EPA)
For a broader exposure to luxury brands, the Amundi Global Luxury ETF looks to track the S&P Global Luxury Index we mentioned earlier – this provides access to approximately 80 listed luxury brands globally.
The ETF holds around 260 million Euros and holds everything from LVMH, Tesla (TLSA:NASDAQ) to Nike (NKE:NYSE).
The Finer Things in Life
Luxury brands are an investment theme that may not necessarily be under the spotlight in portfolios, despite the presence they play in many of our lives from a consumer preference point of view.
This sector stands to benefit from the growing wealth of the middle class throughout Asia, as well as liquidity throughout the world, plus it may be one of the most direct exposures to the concept of ‘buying to feel good’ that this pandemic has encouraged. The only remaining consideration is that if a holding in your portfolio is seen as helping people gain social status, does that count as ESG?
The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.