Consumers from Asia ex Japan, the Middle East, eastern Europe and South America already buy half of all luxury goods and account for the majority of growth. Many emerging market consumers aspire to own western luxury brands and view them as status symbols. They want to show that they can afford an Omega watch or a Louis Vuitton bag. As a result, as the middle class continues to grow, demand for luxury will be strong for years to come. Many luxury consumers, especially from emerging markets, buy luxury products while travelling to Hong Kong, Paris, London or Miami, as they may find better prices – due to lower taxes – and better choice.
Tourists in general play a big role in luxury buying, accounting for around 30 per cent of all sales. Cartier, for example, sells half of its products in Europe to tourists.
This is particularly important for luxury shops in Europe given the challenging environment for the local clientele, especially in the southern part of the continent.
According to Global Blue, a specialist in processing tax refunds, the most important luxury buyers while travelling are the Chinese, Russians, Japanese and Brazilians.
Although emerging markets have been the main growth driver for luxury brands, high-end consumption in the US is doing better than expected, adding to the industry’s growth. Financial recovery and lower unemployment rates have lifted sentiment among upper-income consumers.
Luxury is a profitable business and companies have strong balance sheets. Given the favourable growth prospects, companies continue to invest in new stores. Companies are focusing more and more on opening their own stores instead of distributing their products through third parties or franchise stores.
By managing the store, the brand has better control on how the product is presented and is closer to the consumer. The brand is the most important asset and keeping it sparkling is of utmost importance. While some brands such as Burberry, Hugo Boss and Ralph Lauren still go through department stores, an increasing number are emulating Louis Vuitton and Hermès, and selling their goods purely through their own stores.
The outlook for luxury remains favorable, as wealth in emerging markets continues to grow. In addition, China, for example, would like to make its domestic economy less dependent on exports and investment and is looking to stimulate consumption.
At present, private consumer spending accounts for only 35 per cent of China’s GDP, compared with 70 per cent in the US. Because of the strong prospects for luxury goods with emerging market consumers, an investment in luxury stocks is always a play on growing consumption through solid and well-managed western companies.
Scilla Huang Sun manages the JB Luxury Brands fund. The views expressed here are her own.
Performance of fund since launch vs indices
Source: FE Analytics
The €121.6m JB EF Luxury Brands portfolio has returned 68.32 per cent since it was launched in January 2008. During the same time period, the FTSE 100 and FTSE World indices have returned 14.6 and -0.81 per cent respectively.
Despite a challenging macro backdrop, the fund has returned 21.32 per cent in the last 12 months. Of the 2,786 IMA funds with a sufficient track record, only 19 have managed to return more than JB EF Luxury Brands over this period.
The FSA offshore recognised fund, which is domiciled in Luxembourg, has an FE Crown Fund Rating of five.