Luxury: Timeless quality

Consumers are gradually returning to the stores and while they may be thinking carefully about their purchases, they are still buying luxury goods. The best luxury brands are getting even stronger as they gain market share.

Demand for luxury goods is stabilising as the year progresses. This year’s Christmas is very likely to be better than last year. People have recovered from the shock of last year and although fragile, consumer sentiment is slowly improving. Luxury companies have adapted well to a slower environment. They are focussing more closely on their strengths and have become even more creative and innovative than before.

They know that if consumers get excited by a nice product it always sells, even in difficult times. Many luxury products are sold through the brands own stores, but department stores and other third party retailers have also adapted. This year the department stores have ordered fewer products. People could be disappointed by the level of discounts available in this year’s sales.

Mid- and long-term prospects for luxury goods remain very strong and there are two main drivers behind this. First, the luxury goods industry is growing faster than the overall economy as a result of global wealth creation. Rich people are getting richer and the number of wealthy people is increasing. In emerging markets particularly the number of millionaires is on the rise.

One third of luxury sales are made in these markets. The Chinese buy around 15 per cent of luxury goods and account for nearly half the growth of the luxury industry. Secondly luxury companies can be very profitable. Building a luxury brand is difficult and may take many years. This means the industry has high entry barriers and established brands have pricing power.

Luxury stocks are an attractive investment and tend to outperform in times of recovery. Despite the strong rally witnessed so far this year valuations remain compelling. Luxury stocks are trading below historical averages. Earnings forecasts are modest and are expected to be raised as the environment continues to improve.

Andrea Gerst and Scilla Huang Sun are asset managers at Julius Baer. The views expressed here are their own.