Is it a good moment to invest in the Luxury industry?

Is it investing in the Luxury industry a good idea? The Luxury industry suffered some changes in 2020, however, their knowledge of the customer and their ability to sell experiences and a lifestyle rather than a simple product, have made that high end companies, especially those in premium sports and luxury had a good year. The experts say that in 2021 we can expect a rematch in the consumption, with expected record in Luxury.

We have spoken to the fund managers of three of the top funds to invest in the Luxury industry, Pictet, GAM Investments and Notz Stucki, to learn about their insights in the luxury sector, best asset allocations and if it is a good moment to invest in the Luxury Industry.

Source: Morningstar, Category Sector Equity Consumer Goods & Services , returns 5 years annualised as per 25/08/2021

Caroline Reyl, Fund Manager Pictet-Premium Brands

However, the minimum came in the second quarter of 2020 and, despite the pandemic, companies with high-end brands had a good 2020, especially those in premium sports products and luxury.

It should be borne in mind that these companies have the knowledge and experience, often rooted in tradition, to meet consumer aspirations, including the need for social recognition, status, success and well-being.  Moreover, the pandemic has accelerated the search for quality and duration.  In addition, consumers are increasingly interested in experimenting and the trend towards personalization is noteworthy, with brands with which they express their identity and values. This aspect is highlighted in emerging economies, as their average income increases. In China by 2030 the population with highest purchasing power may account for 15%. 

In addition, these companies take care of the customer experience and increasingly invest in interactions in the stores, events and virtually.  Its integrity is important, hence its control of the supply and distribution chain, facilitated with data analysis and digital marketing.  Brands such as L'Oreal and Estée Lauder already in 2019 had increased their online sales 30% and it is estimated that 40% of luxury sales will be online by 2025.

In many cases these companies have been in business for decades, even centuries, with high barriers to entry and ability to impose prices, higher margins and its own brand ecosystems.  Its superior growth has been demonstrated over the last ten years.  They generally maintain cost discipline.  Their high cash flow generation and low dependence on debt has once again proved relevant in 2020.  In fact, in the last sixteen years we have seen multiple crises always followed by bigger and faster upswings in premium brands.

Now, in 2021 we can expect a rematch of consumption, with expected record in luxury.  Indeed, profits have been solid and the forecasts have been improved.  The US and China have benefited from strong consumer spending and Europe, in the earliest stage of recovery, is expected to see it in the second half.

In particular, there has been a good performance of European luxury and premium sporting goods, compared to technology, where investors have rotated. Even Marriott and Hilton hotel chains have shown a healthy generation of cash flow and hotels and travel should have a good second semester, as well as high-end beverages and food.  In this state of affairs we have continued to increase exposure to American Express, LVMH and L'Oreal, as well as high conviction companies as Apple, Lulu, Visa or Estée Lauder.

Swetha Ramachandran, Fund Manager GAM Luxury Brands Equity Fund

Covid-19 if anything made luxury products more relevant, not less – as consumers flocked to tried and trusted brands across categories such as skincare, wines and spirits and fashion accessories – with the leading brands in these areas winning over cheaper products.

Household savings across economies accounting for 60% of global private consumption (the US, EU, UK and China) are at elevated levels relative to history. Where economies are in a more advanced stage of reopening than others, we see a strong willingness among consumers to spend down some of these accumulated savings. 2021 looks like it will mark the turning of the page on the crisis – with growth from the emerging middle class in China leading the way, supported by Americans beginning to unleash savings built up in the past year. In addition, as part of the luxury sector, the circular economy in fashion – led by resale and rental models – will become increasingly important, led by younger generations’ preference for sustainability.

This in mind, luxury will benefit from the secular tailwind of a new wave of aspirational middle-class consumers entering the segment for the first time. Luxury sits also at the heart of the growing shift towards sustainability – in line with a “Buy less, buy better” mindset that consumers are increasingly embracing. 

The steady growth in both the demand for luxury goods globally as well as in shareholder returns from the shares of luxury companies proves the longevity of this theme. The appeal of investing in a luxury focused fund is to benefit from emerging market led growth but at a lower, developed market cost of capital with the supporting governance structures - that’s the asymmetry investors can benefit from, low cost of capital against higher than typical returns on that capital by virtue of being exposed to the emerging middle class consumer.

That forms the base of our fund’s investment strategy. Our fund seeks to exploit the investment appeal of this by investing in the top 30-35 stocks that are best positioned to benefit from these trends. Our investment universe comprises brands exposed to luxury/mass affluent consumers with heritage and strong pricing power – fashion and leather goods, cosmetics, athleisure, watches and jewellery, leisure, cars, fine wines and spirits, luxury e-commerce. 

Marie-Caroline Fonta, Fund Manager and Raffi Balyozyan, Investment Advisor Diversified Growth Company - Franck Muller Luxury Fund

1) China. By 2025, most luxury items are expected to be purchased by Chinese customers, with more than a quarter of global sales made in mainland China, compared to just 11% in 2019 (Bain & Company). We are seeing a high percentage of first-time shoppers, specifically among the younger generation. 

2) Its lead in the digitalisation race. The digital movement that started before 2020 has accelerated. According to Bain & Co., luxury e-commerce is expected to exceed 30% in 2025 to become the largest distribution channel. The crisis has pushed some rural areas online. In 2020, for instance, online sales of high-end cosmetics exploded, rising 60%. This has not spelled doom for brick-and-mortar, though, because people still want the in-store sensory experience.  

3) Ever-younger consumers with strong convictions. Millennials and GenZ (who will make up about 55% of luxury consumers by 2025, says Bain & Co.), will “buy less but buy better”. ESG is a bigger factor for the sector, creating new opportunities for those in the circular economy and the second-hand market. The response to this demand includes traceability and data collection along the supply chain.

4) A fast-growing consumer base. The number of millionaires and billionaires continues to increase quickly. In China and Hong Kong, a new billionaire is created every 1.5 days; and in the total number of billionaires (992), they are ahead of the United States (696) and India (177) combined. Globally, the extra savings piled up since the start of the pandemic and the narrowing wage gap between women and men, especially in mature markets like Western Europe and the US, will have a positive impact on sales of luxury goods.

5) There will be more consolidation in the sector, where economies of scale play a major role. The big conglomerates like LVMH, Kering, and Richemont understand that when negotiating a physical location, the more brands they have, the better their placement and the lower their rent. Like their European counterparts, we think the potential for US and Chinese luxury brands remains limited; luxury consumers want to be cosmopolitan and wear exclusive brands everyone knows, to bolster their self-esteem.

6) For the major players in the European sector, the luxury premium is in line with, or behind, its March 2020 level. Players in the luxury goods sector have solid balance sheets and high-margin businesses – so they can absorb a few blows. The industry has bounced back faster than anticipated. Valuations are high, but the estimated P/E ratio compared to the market is in line with or less than the March 2020 level. EPS and ROE are on the rise.   

As you can see, investing in the luxury industry could be a great option, If you want to read more articles from experts and insights from the equities market, check out our equities section.