Strategic Insights │ Chic happens (deals with it)

Strategic Insights │ Chic happens (deals with it)

Published November 5, 2021

Investing – an antidote to consumer guilt

The guilt that we often feel in relation to any expensive purchase is evidenced in our tendency to label it “an investment”.
“I’ve just invested in the latest iPhone”, somebody might say. Or…”I’ve decided to invest in a more durable coat for the winter”.
But have they? Have they really?. Apple has yet to design a device that actually increases in value over time… or even holds it, for that matter. So if investing money is defined as allocating it with the expectation of a positive return in the future, then purchasing a new mobile phone is actually the very opposite of an investment, since it is almost certain to depreciate in value very quickly after purchase before ending up in landfill.

What about my US$3.8 million Mouawad diamond purse?

One of the weirder takeaways from Deloitte’s recently published “Global Powers of Luxury Goods” report is that owning a luxury handbag can actually be a more sensible investment than owning gold.
Luxury items that cost millions of pounds symbolise status and wealth. So it stands to reason that investing in the companies that make them can actually be a very smart move.
As we start to emerge from nearly two years of pandemic and economies start to recover, much of our enthusiasm for spending money is being targeted at the luxury goods sector. But even before Covid, a number of companies were reporting unprecedented increases in sales. French group LVMH, for example, often considered emblematic of the sector as a whole, saw 52% growth year-on-year. The increase in demand has continued, so much so that its sales in the first quarter of 2021 were 8% higher than they were in the pre-Covid days of the first quarter of 2019.
We are seeing similar patterns throughout the luxury goods sector. Sales of luxury vehicles were particularly strong in the first quarter of 2021. Lamborghini, which builds cars to order, has seen all-time record deliveries this year – some 25% more than in previous years. Mercedes-Benz, meanwhile, has seen a 16% increase on the first quarter of 2020. Numerous other luxury categories (such as watches and jewellery) have all followed comparable trends in this new post-Covid economy.

Strong returns for luxury goods

So a handbag may indeed be a better bet than gold, bitcoin or bonds. And that’s why Investment Quorum feels confident about owning a number of funds which feature prominent luxury names. These include GAM’s Luxury Brands Equity fund, Man’s GLG Continental European Growth fund and Lindsell Train’s UK Equity fund (whose holdings include Burberry and Remy Cointreau). Some of these funds have exceeded the returns of the S&P 500 by a significant margin. And incredibly, luxury goods stock even outperformed US tech stocks by some 18% over the same period.

Sustainability is key

Just like those tech stocks, alongside healthcare, biotech and pretty much everything else, the world of luxury goods has been utterly shaken up by the emergence of environmentally aware, socially savvy Consumer 2.0 from the ether, their gaze firmly focused on sustainability.
Even before Covid, luxury brands were investigating innovative, more meaningful ways to establish relationships with their customers. New technologies have been helping to create new growth levers, and on a fast-changing landscape, luxury brands will need to factor in sustainability if they are to survive.

Guess who’s driving growth in the global luxury market

Time and again in our Strategic Insights articles, we find ourselves recognising the growing dominance of China and its armies of consumers. In 2020, they accounted for a staggering 35% of global spending on luxury goods. This figure is expected to increase to 40% in the next four or five years – that’s nearly twice China’s share just a decade ago.
With its burgeoning numbers of Gen Z billionaires, China is quickly establishing itself as the biggest market for luxury items. Unlike their European counterparts, those millennials and Gen Zs are not saddled with university debt and already account for some 70% of China’s luxury fashion segment. As they enter their peak earning years, their appetite for luxury goods is destined to generate further growth across the sector.
Historically, Chinese consumers have had a reputation for driving growth in high-end fashion boutiques across the whole bricks-and-mortar world – not just in their own country. So as people start travelling again, luxury companies are likely to benefit from a full rebound in Chinese consumption.

What else has helped the luxury segment?

The pandemic has demonstrated that very few companies are completely immune to large-scale disruptions. Indeed, several companies in the luxury goods sector suffered falls in their sales. But thanks to a number of unique factors, the sector was not quite so hard-hit as many others were.
For example, it is widely acknowledged that people on lower incomes across the planet have been disproportionately affected by Covid and the economic woes created by it. People on higher incomes, however, have not had to tighten their belts in quite the same way.
And the pandemic has given an unprecedented boost to e-commerce – which people in all income brackets have taken advantage of. Forced to do without swanky showrooms for showcasing their wares with the personal touch, luxury goods companies have become less snooty about e-commerce and have finally embraced it.
Then there’s the fact that many people have become accidental savers: the result is that they have been able to channel the cash that they might normally have spent on travel, entertainment and eating into luxury items.
These paradigms shifts – alongside the constraints created by the pandemic – go some way towards explaining why luxury goods sales have practically doubled in the past couple of years.

Funds that allow investors to leverage this opportunity

The luxury segment operates in ways that are very different from other consumer segments: demand for luxury goods from wealthy, loyal customers continued practically unabated during the pandemic. Since these higher net-worth individuals have not been financially constrained in the same way as others, we believe that the luxury goods segment merits consideration as a consumer segment in its own right.
Investment Quorum has its gaze firmly focused on the future. We believe that luxury – in the same way as technology and biotech – is a sector that offers significant long-term growth potential. A number of funds that we own have exposure to luxury brands such as Hermes, Burberry, Ferrari and L’Oreal. Some have a high concentration in luxury goods, others have a relatively low concentration. Choosing the right fund will depend on factors like your appetite for risk. As the world’s more affluent people continue to spend money on luxury items, interesting options for diversifying investment portfolios will emerge. The funds that we have will continue to create attractive opportunities for investors seeking to capitalise on the emergence of new spending patterns.