Long-term investors should look to luxury goods

A professional investor tells us where he’d put his money. This week: Zehrid Osmani of the Martin Currie Global Portfolio Trust selects three favourites

The rapid expansion of the emerging-market middle class is a key long-term growth theme. In China alone, the middle class is expected to more than double over the next ten years, while the segment defined as affluent is forecast to grow even faster. As a result, one area of interest over the coming decade and beyond is luxury goods.

We expect growth in the emerging-market luxury sector, especially in China, to continue to outpace global growth and accelerate as price harmonisation, more sophisticated marketing and e-distribution democratise access. With global markets worried about a short-term slowdown, this may prove a good opportunity for long-term investors to consider this structural growth story. The following companies offer excellent exposure to the theme.

Europe’s classic luxury brands

The France-based luxury group Kering (Paris: KER) owns brands including Gucci, Yves Saint Laurent, Bottega Veneta, Balenciaga and a few other high-end labels. Gucci has experienced a broad global resurgence owing to the long-term structural demographic and social trends mentioned above. It is therefore likely to remain stronger for longer and bolster sales and profitability. Yves Saint Laurent should continue to produce good returns and we expect the management to rectify the problems faced by Bottega Veneta over the next two or three years, which should lead to renewed growth.

Importantly, the Kering group has only just re-focused purely on luxury after dabbling with other areas such as sportswear; this is transformational for the group’s return on invested capital (ROIC, a key gauge of profitability) and future prospects for growth and value creation. We believe a culture of growth and investment will protect this profile and boost shareholder returns.

Luxury va-va voom

The Italian sports car manufacturer Ferrari (Milan: RACE) provides a unique play on the global growth of high-net-worth individuals and their passion for high-end cars and motorsports – especially in emerging markets. The company boasts valuable brand equity and enviable pricing power, with huge scope for average selling prices to increase through greater use of the “special series”: limited-edition, more expensive models, along with its exclusive Icona range. As a result, we believe Ferrari is likely to see strong profit and cash flow growth and significantly improve its ROIC over the next five years.

Moncler will march on

Moncler (Milan: MONC) is the undisputed global leader in super-premium down jackets and has a rich heritage and strategic focus on long-term sustainable and responsible growth. The business is still expanding its distribution channels and the total available market is very large compared with current sales.

However, investors currently seem focused on short-term concerns around trade and a slowdown in China, and appear to be overlooking the attractive long-term growth opportunity and the management’s exemplary execution. Taking the long-term view, we think the structural growth potential of the company is compelling, and its ability to continue to innovate remains strong.