As global stock markets fall and the cost-of-living crisis bites, one sector is proving surprisingly resilient. Several luxury brands are defying the gloom as their wealthy clientele are still willing to splash the cash.
Mulberry has seen profits quadruple and last month restarted paying dividends for the first time since the pandemic. Adrian Hallmark, boss of Bentley, has revealed the luxury car maker has a bulging order book. ‘People with a lot of wealth still have a lot of wealth in a recession,’ he said. ‘There is still a lot of money around.’
But not all luxury brands are faring as well – investors need to be careful about where they seek out opportunities.
Driving force: Investors need to be careful about where they seek out opportunities
Rob Burgeman, senior investment manager at wealth manager Brewin Dolphin, explains: ‘Luxury goods manufacturers are not immune to recessions. However, for their clientele, recessions do tend to bite rather less deeply than for a company targeting a less well-heeled customer base.’
The treasures that remain bombproof
He luxury label is slapped on many brands, from household names such as Apple and drinks seller Diageo to upmarket car makers such as Ferrari and Tesla.
Some of the more traditional businesses in this sector include UK fashion chain Burberry and European businesses LVMH (owner of Louis Vuitton); Richemont (which owns Cartier jewellery, Chloe fashion and Montblanc pens); car maker Ferrari; and beauty businesses Estee Lauder and L’Oreal.
Many luxury shares should be ‘relatively bombproof’ because their customers are too rich to care about inflation, says Richard Hunter, head of markets at wealth platform Interactive Investor.
He adds: ‘The customers themselves are also largely immune from such pressures, while the cachet of owning luxury goods is irresistible to some.’
However, not everyone who purchases luxury items is rich. Plenty of people on lower incomes save up for Apple AirPods, for example, or a once-in-a-lifetime Mulberry handbag. These customers are more likely to hold back from making purchases in the difficult economic climate, in part because it will take that much longer to save up for a special item as rising inflation eats into disposable incomes.
‘Any middle or lower-income purchasers of luxury goods will be prioritising other things at the moment as the cost-of-living crisis takes hold,’ says Juliet Schooling Latter, head of research at fund research group FundCalibre.
A mixed picture… but good outlook
Not all luxury brands are proving resilient. Many are still recovering from the impact of the pandemic. Burberry, for example, suffered from the drop in tourism, which it relies on heavily to get consumers into its shops.
The brand also sees China as a major source of growth, so continued lockdowns in the country have hit it hard. Shares in the British fashion brand are down 13 per cent over the past three years.
Iconic: Alexa Chung in a collaboration with Mulberry
Some brands that have seen particularly strong growth in recent years are crashing back down to earth with a bump.
Premium timepiece seller Watches of Switzerland, whose share price nearly quadrupled throughout 2020 and 2021, has seen shares halve in value so far this year.
By comparison, Ferrari is down 17 per cent so far this year, with Mulberry up 2 per cent.
Even luxury brands that have hit a bumpy patch may still have a good long-term outlook. As well as existing well-heeled customers, an emergent middle-class in the developing world has a growing appetite for luxury goods.
High-end goods are likely to benefit in the long term. Schooling Latter says that there is ‘certainly a case’ for luxury goods in the long term as parts of the world become richer. ‘Maybe buy when share prices dip if you are tempted,’ she says.
Pick brands with the best reputation
Zenah Shuhaiber, portfolio manager at investment trust JPMorgan European Growth & Income, believes that brands with the strongest reputation tend to hold up the best in tough times. ‘In the global financial crisis, for instance, LVMH only witnessed a 1 per cent reduction in sales,’ she says. ‘How well the company is managed will also determine how a luxury company performs in a downturn.’
Rob Burgeman believes that luxury brands will only succeed if they maintain an air of exclusivity. The worst thing they can do in a recession is cheapen their brand by selling bargain branded items to drive sales.
‘The key for all of these companies is an understanding of how to maintain and enhance a portfolio of brands and products, while protecting, enhancing and premiumising their offering,’ he says.
‘In turn their goods become aspirational and desirable amongst a wealthier clientele, especially in the emerging world.’
He cites the Burberry baseball caps that were so popular in the early 2000s as a case in point. The brand had to pull them after they became associated with football hooligans. Customers will only pay a luxury price tag if they believe the product they are buying remains exclusive.
Emma-Lou Montgomery, an associate director at asset manager Fidelity International, says that Mulberry appears to be doing everything right, and that this is now being borne out by performance.
‘With global brand awareness a priority, international sales rebounding and a focus on sustainability in mind, the luxury retailer has performed strongly over the last year,’ she says. Burgeman is similarly positive about Burberry’s strategy. ‘Its decision to exit non-luxury items and discounting is already bearing fruit,’ he says. ‘Burberry is becoming increasingly popular with an engaged younger audience. This bodes well for future profits.’
Fund gives access to several top brands
You can gain access to shares in luxury brands by buying a fund that holds several. This means that you don’t have to throw your lot in with just one or two companies. For a low-cost option, Burgeman likes Amundi S&P Global Luxury Exchange Traded Fund, which costs just 0.25 per cent and tracks a number of top luxury brands. Its top holdings include Tesla, LVMH, Richemont, Estee Lauder, Diageo and Nike. The fund is down 15 per cent over a year, but up 32 per cent over three years.
Alternatively, there are a number of funds that have a high proportion of luxury companies, which have been handpicked by a fund manager. These are more expensive because you are paying for their expertise. Options include Fundsmith Equity (down 10 per cent over a year and up 20 per cent over three) and the Morgan Stanley Global Brands (up 4 per cent over a year and up 25 per cent over three).
James Carthew, head of investment trust research data service QuotedData, suggests AVI Global, which has a number of luxury holdings among a broader base of large companies. Nearly seven per cent of the investment trust is invested in EXOR, which owns Ferrari, while Christian Dior makes up four per cent. AVI Global has risen 25 per cent over the past three years and is currently trading at a 10 per cent discount.
Most luxury brands are from Europe, so buying a fund of European companies will also give you some access.
Janus Henderson European Selected Opportunities holds LVMH in its top ten holdings, and FTF Martin Currie European Unconstrained has Ferrari and high-end clothing brand Moncler in its top ten. These funds have risen 13 per cent and 5 per cent over three years respectively.
Forget the shares, some just prefer a passion investment
Some investors choose to purchase luxury items as investments, rather than buying shares in the companies that make them.
A number of these purchases have proven a lucrative investment in recent years. However, it is not an easy way to make money.
You have to pick the right asset and brand, store it carefully and pray that it does not go out of fashion.
These items are often known as ‘passion investments’ and should only make up a small proportion of your portfolio. It could be dangerous to rely on them to make you money. According to the Knight Frank Luxury Goods Index, luxury goods as a whole are up nine per cent over a year, with wine, watches and art the best performers.
Wine appreciated 16 per cent in the year to March, with watches increasing similarly and art up 13 per cent.
Handbags increased in value by 7 per cent. However, only certain items will have seen these sort of gains.
Investments such as wine and whisky do not attract capital gains tax either, which can add to their attractiveness.
If you already have luxury assets or are considering them, you could check the LuxPrice Index at Collector Square to see previous sale prices.
Go to collectorsquare.com.
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