How to invest in the lure of luxury goods

A professional investor tells us where he’d put his money. This week: Sam Morse of the Fidelity European Values Fund PLC selects three favourites.

While continental European equity markets performed well in the first half of 2019, volatility over the summer has shown that few of the issues previously troubling markets have been resolved. Trade threats rumble on and political uncertainty remains high with Brexit negotiations at an impasse. Investors have welcomed central banks’ shift towards monetary easing, but there is a risk that it could fail to kick-start global economic and corporate earnings growth.

Against this uncertain backdrop, Fidelity European Values PLC remains focused on investing in attractively-valued companies able to sustain consistent dividend growth and perform well irrespective of the economic backdrop. Over the long term these types of companies tend to outperform the broader market.My portfolio contains three global luxury goods companies with defensive qualities thanks to their top-quality franchises and growing sales in emerging markets.

L’Oréal: because it’s worth it

L’Oréal (Paris: OR) is the biggest cosmetics company in the world with a 13% market share. It pays a 2% dividend yield and is growing at a near-double-digit rate. The stock’s total return in the next few years should exceed the market’s. Its growth has been driven through the ageing of populations in developed markets and through an expanding middle class in emerging markets. L’Oréal is often considered expensive on around 25 times next year’s earnings. But the beauty market is very resilient, so this company would be able to continue to grow its earnings if there is an economic downturn.

LVMH: an unrivalled portfolio of brands

LVMH (Paris: MC) is the world’s number-one luxury goods company. The firm has an unrivalled portfolio of brands across fashion and leather goods (such as Louis Vuitton and Christian Dior), wines and spirits (Hennessy, Moet & Chandon), perfumes and cosmetics (Givenchy) and watches and jewellery (TAG Heuer, Bulgari).

It has consistently delivered a good cash-flow return on investment coupled with strong growth and it remains well placed to benefit from the ongoing growth in luxury goods driven by middle classes in emerging markets, notably in China. Its brand equity, scale and diversification make it relatively defensive within its peer group if demand slows.

Hermes: a name with rare cachet

Hermes (Paris: RMS) creates some of the most sought-after bags, scarves and ties in the world. In some cases customers may have to wait several years before they can actually acquire an item. This is because Hermes restricts the quantity of goods it produces so that it can ensure it retains the highest possible quality in every aspect of its work.

This scarcity value creates strong pricing power and also provides a buffer in periods of weaker demand, when Hermes can simply work through its waiting list. As a result Hermes has delivered an extremely consistent and defensive financial performance and this is reflected in its strong outperformance through the financial crisis in 2008/2009. Hermes trades on high multiples, but this reflects the exceptional performance since its flotation in 1993 and the extremely encouraging growth outlook from here.