As global stock markets tumble and the cost of living looms, one sector is proving surprisingly resilient. Several luxury brands are defying the gloom as their affluent customers are still willing to splash the cash.
Mulberry’s profits have quadrupled and last month it resumed its dividend for the first time since the pandemic. Adrian Hallmark, the boss of Bentley, has revealed that the luxury car maker has a large order book. “People with a lot of wealth still have a lot of wealth in a recession,” he said. “There’s still a lot of money around.”
But not all luxury brands are doing so well – investors should be careful where they look for opportunities.
Driving force: Investors should be careful where they look for opportunities
Rob Bergman, senior investment manager at Brewin Dolphin, explains: “Luxury manufacturers are not immune to recessions. However, for their customers, recessions tend not to be as deep as for a company targeting a less affluent customer base.”
Treasures that remain bombproof
Its luxury label carries a host of brands, from household names such as Apple and drinks retailer Diageo to high-end carmakers such as Ferrari and Tesla.
Some of the more traditional businesses in this sector include British clothing chain Burberry and European companies LVMH (owner of Louis Vuitton); Richemont (which owns Cartier jewelry, Chloe fashion, and Montblanc pens); car manufacturer Ferrari; and cosmetics companies Estee Lauder and L’Oreal.
Many luxury stocks need to be “relatively bombproof” because their clients are too wealthy to care about inflation, says Richard Hunter, head of markets at wealth platform Interactive Investor.
He adds: “Customers themselves are also largely immune to such pressures, while for some the emblem of luxury ownership is irresistible.”
However, not everyone who buys luxury goods is rich. Many people on low incomes will save for Apple AirPods or a once-in-a-lifetime Mulberry handbag, for example. These customers are more likely to hold back from shopping in tough economic times, in part because it will take much longer to save up for a special item as rising inflation eats away at disposable incomes.
“Any middle-income or lower-income luxury buyer will look to other things now that the cost-of-living crisis is taking hold,” said Juliet Schooling Latter, head of research at FundCalibre’s research group.
Mixed picture…but good outlook
Not all luxury brands have proven to be sustainable. Many are still recovering from the effects of the pandemic. Burberry, for example, has been hit by a drop in tourism, which it relies heavily on to draw consumers into its stores.
The brand also sees China as a major source of growth, so the prolonged lockdowns in the country have hit it hard. Shares in the British fashion brand have fallen 13 percent over the past three years.
Iconic: Alexa Chung in collaboration with Mulberry
Some brands that have achieved particularly strong growth in recent years are falling sharply to the ground.
The premium watch retailer Watches of Switzerland, which saw its stock price nearly quadruple in 2020 and 2021, has halved its share price this year.
In comparison, Ferrari is down 17 percent this year and Mulberry is down 2 percent.
Even luxury brands that have fallen on hard times may still have good long-term prospects. Like existing affluent customers, the emerging middle class in developing countries has a growing appetite for luxury goods.
High-end items are likely to pay off in the long run. Schooling Latter says that in the long term, as some parts of the world become wealthier, “there’s definitely a case” for luxury items. “Maybe buy when share prices are falling, if you’re tempted,” she says.
Choose brands with better reputations
Zena Schuheber, portfolio manager at JPMorgan European Growth & Income investment trust, believes that brands with the strongest reputations tend to hold their best in tough times. “For example, during the global financial crisis, LVMH’s sales fell by only 1 percent,” she says. “How well a company is managed will also determine how a luxury company performs in a downturn.”
Rob Bergman believes that luxury brands will only succeed if they maintain an air of exclusivity. The worst thing they can do in a recession is to cheapen their brand by selling bargain branded items to increase sales.
“The key for all of these companies is understanding how to maintain and grow their portfolio of brands and products while protecting, enhancing and growing their offering,” he says.
“In turn, their goods become desirable and desirable among a wealthier clientele, especially in developing countries.”
As an example, he cites the Burberry baseball caps that were so popular in the early 2000s. Marca had to pull them after they became associated with football hooligans. Customers will pay a luxury price tag only if they believe that the product they are buying remains exclusive.
Emma-Lou Montgomery, associate director of asset management at Fidelity International, says Mulberry seems to be doing things right, and now the performance is proving it.
“Thanks to global brand awareness, renewed international sales and a focus on sustainability, the luxury goods retailer has performed strongly over the past year,” she says. Burjman is similarly positive about Burberry’s strategy. “Her decision to get out of non-luxury and discount goods is already paying off,” he says. “Burberry is becoming increasingly popular with an active young audience. It promises future profits.’
The fund provides access to several leading brands
You can gain access to shares of luxury brands by buying a fund that holds several. This means you don’t have to stick with one or two companies. As a low-cost option, Bergman likes the Amundi S&P Global Luxury Exchange Traded Fund, which costs just 0.25 percent and tracks a number of leading luxury brands. Its top holdings include Tesla, LVMH, Richemont, Estee Lauder, Diageo and Nike. The fund is down 15 percent for the year, but up 32 percent over three years.
Alternatively, there are a number of funds that have a large proportion of luxury companies that have been selected by the fund manager. They cost more because you are paying for their expertise. Options include Fundsmith Equity (down 10 percent for the year and up 20 percent over three years) and Morgan Stanley Global Brands (up 4 percent for the year and up 25 percent over three years).
James Carthew, head of investment trust research service QuotedData, suggests AVI Global has a number of luxury holdings among a broad base of large companies. Almost seven percent of the investment fund is invested in EXOR, which owns Ferrari, while Christian Dior makes up four percent. AVI Global has risen 25 percent over the past three years and is currently trading at a 10 percent discount.
Most of the luxury brands are from Europe, so buying a fund of European companies will also give you some exposure.
Janus Henderson European Selected Opportunities has LVMH in its top ten holdings, while FTF Martin Currie European Unconstrained has Ferrari and luxury clothing brand Moncler in its top ten. Over three years, these funds increased by 13 and 5 percent, respectively.
Forget stocks, some simply prefer passion investing
Some investors choose to buy luxury goods as an investment rather than buying shares in the companies that make them.
A number of these purchases have turned out to be profitable investments in recent years. However, this is not an easy way to make money.
You have to choose the right asset and brand, store it carefully and pray that it doesn’t go out of style.
These items are often known as “passion investments” and should only make up a small portion of your portfolio. It can be dangerous to rely on them to make money. According to Knight Frank’s luxury goods index, luxury goods as a whole are up nine per cent year-on-year, with wine, watches and art performing the best.
In the year to March, the price of wine rose by 16 percent, watches also rose, and art products – by 13 percent.
Bags have increased in value by 7 percent. However, only certain items will see such benefits.
Investments such as wine and whiskey are also exempt from capital gains tax, which can add to their appeal.
If you already own or are considering luxury items, you can check the LuxPrice Index on Collector Square to see previous sale prices.
Go to collectorsquare.com.
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