Global wealth creation drives demand for luxury

Luxury sales are improving quarter by quarter and companies are, overall, in good shape.

Companies have continued to invest, Louis Vuitton recently opened a new flagship store in London, Burberry is almost doubling investments this year. Sales are also strong, for example Coach, the US luxury brand, announced that their sales targets in China are a year ahead of schedule.

While an improvement in the luxury market was anticipated, especially given the low comparison base from last year, the rebound is stronger than expected. Luxury spending in the US has surprised on the upside since the beginning of this year and there is (clear) a link between equity markets and consumer spending. Last spring, consumers felt less wealthy and as a result spent less on luxury goods. The S&P500 is now up about 70 per cent from its low point a year ago and many people are close or back to pre-crisis wealth levels. Luxury stocks usually outperform in a recovery and this has proved to be the case again.

Global wealth creation drives luxury demand and it's not the average consumer that counts. In the US for example, 60 per cent of income is earned by the top 20 per cent households and in China, the top 20 per cent earners account for half of household income.

We expect the luxury industry to grow further this year, with sales growth of at least 5 per cent. Growth will mainly be driven by emerging markets, especially in China where the luxury industry is booming, driven by increasing wealth and a strong desire for Western luxury brands. In 2001, 16 million Chinese tourists travelled to Europe; by 2008 this figure had grown to 49 million.

Today, emerging market consumers account for most of luxury growth. Half of industry growth comes from the Chinese and the majority of new luxury stores are opened in Asia. In addition to the cost base in Europe for many luxury companies, with an increasing number of wealthy Asian tourists travelling to the continent, many luxury companies stand to benefit from a weaker euro.

Exciting innovative products always sell and a luxury brands success come from the product, its positioning, consistency and innovation. When investing in luxury companies the saying 'the winners take it all' is true, especially in economic challenging times. We believe that investors should focus on strong brands with heritage, good management and solid finances. In other words, companies that can gain market share and remain profitable even in a difficult environment.

Scilla Huang Sun is portfolio manager of the Julius Baer Luxury Brands Fund, Swiss & Global Asset Management. The views expressed here are her own.