Invest in lucrative luxury goods

The long-term outlook for luxury is compelling. Matthew Partridge explains how to profit

Luxury goods
(Image credit: Getty)

Over the past 15 years, many of us have seen our incomes squeezed by recessions, a pandemic, inflation and higher interest rates. So you might expect the demand for luxury goods to have fallen. But the sector is thriving. 

Ben Laidler, global markets strategist at investment platform eToro, notes that according to consultants Bain, the value of the personal luxury-goods market – beauty products, watches, jewellery and shoes – has almost tripled from €122bn to €354bn since 2002. 

Jamie Ross, portfolio manager of Henderson EuroTrust, notes that if you’d invested in luxury conglomerates such as LVMH a decade ago, you would “have received annual returns of around 25%”. 

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Fortunately, it’s not too late to jump in, as the sector still has ample room for growth. The number of millionaires is expected to reach 87 million by 2026. Part of this is due to the “stellar” asset market returns of the past 15 years. 

The upswing has disproportionately benefited the wealthy, who “are more likely to get their income from investments in equities, bonds [and] real estate... rather than from salaries”, says Aidan Neill, co-founder of media agency Mediabridge Global. 

In the past ten years, rare whisky has returned 373% and vintage cars 185%. Fine wine and vintage watches have soared by 162% and 147% respectively. 

The world’s rapidly expanding luxury market  

Luxury-market expert Said Chaarawi, co-founder of IRD Consultancy, points out that the middle and upper-middle classes, rather than the very richest people, account for the majority of consumers of upscale goods – especially branded ones. 

While 90% of the global middle class used to live in North America or Europe, China alone now comprises a fifth of the world’s middle class, says Chaarawi. 

Instead of reducing prices, which had been the usual response to past downturns, luxury brands actually maintained prices and instead increased investment to “focus on their core strengths and heritage”, says Charles-Henry Monchau, chief investment officer for Bank Syz. 

Perhaps the best-known of these tactics is the use of special and limited editions of products, which has greatly increased over the past decade. These come with the added advantage that they can be sold to consumers at premium prices. 

Focusing on the in-store experience “through... exhibitions, restaurants, events and even fully-branded-gyms” has increasingly enabled the brands to bypass retailers who had played the role of middlemen between firms and their customers, says Giles Rothbarth, portfolio manager of the BlackRock European Dynamic Fund. 

All these strategies and tactics have enabled luxury-goods sellers to maintain or increase margins while continuing to grow – good news for shareholders.

EuroTrust’s Jamie Ross believes there is ample scope for luxury goods companies to increase revenue by persuading customers to “trade up to higher-end products”. 

They also have room to take further advantage of their pricing power, especially since many of the highest quality brands are either price-inelastic (demand is relatively unaffected by price rises), or in a few cases the items are “Veblen goods” – the higher the price, the greater the demand. 

Another long-term trend that will boost growth is what Lucy Coutts, investment director at JM Finn, calls the “digitisation of luxury”. 

People are seeking to buy products that they can show off on Facebook and Instagram. The role of celebrities and influencers in helping to coax people into buying luxury products is becoming so important that companies are making big efforts to get them to play the role of “brand ambassadors”. 

Swetha Ramachandran, investment director for luxury equities at GAM Investments notes that “the average Gen-Z consumer is just 15 years old when they buy their first luxury product”. This is good news as “people who tend to buy luxury products at a young age tend to be longer-lasting customers than those who start buying when they are older”. 

What to buy now 

One way to invest in a broad range of luxury-goods companies, rather than picking individual shares, is through the Amundi S&P Global Luxury UCITS ETF (Milan: GLUX). This aims to track the S&P Global Luxury index. The exchange-traded fund (ETF) has investments in about 80 major luxury-goods companies, mostly in the US or Europe. The five largest holdings are luxury conglomerates Richemont, LVMH, Hermès and Kering, as well as carmaker Mercedes. It has an ongoing charge of just 0.25% 

Perhaps the best-known luxury conglomerate is LVMH (Paris: MC), which is Europe’s largest listed company. Ben Laidler of eToro is impressed by the fact that it has “75 luxury brand ‘maisons’ across six segments”. Sales have nearly doubled between 2017 and 2022, and are expected to keep growing at roughly 12% a year. LVMH trades at 23.5 times estimated 2024 earnings. The fact that nearly half of LVMH is owned by the Arnault family helps keep the interests of managers and shareholders aligned. 

An even faster-growing luxury goods company is Hermès (Paris: RMS). The company is well known for its leather bags, although it also makes money from other leather goods, as well as luxury products such as diaries. Lucy Coutts, investment director at JM Finn, notes that despite its rapid sales growth of about 15% a year, it is has managed to maintain its exclusive image, producing only 12,000 of its highly-prized Birkin bags annually. The clientele are permitted to buy just one bag a year. The emphasis on exclusivity and desirability has given Hermès one of the highest operating margins in the sector, helping to support a valuation of 43.5 times 2024 earnings. 

Swetha Ramachandran of GAM Investments is a big fan of luxury brands owner Richemont (Zurich: CFR) thanks to its emphasis on branded jewellery and its “significantly improved execution in recent years”. He thinks the company’s brands are strong enough for it to raise prices significantly without hitting demand. Richemont has achieved double-digit sales growth and become much more efficient in deploying capital. Its return on capital employed (ROCE) has jumped from 5% to 17% over the past few years. This more than justifies a 2024 price/earnings (p/e) ratio of 20.3. 

Ramachandran is also bullish on Italian fashion company Moncler (Milan: MONC). The group has been able to increase both the number of stores it runs and the range of goods it sells. Originally focused on outwear for skiers and mountaineers, “it is now moving into knitwear, footwear and eyewear”, making “the spirit of the mountains relevant to a younger, diverse global consumer”. Sales have jumped by more than 150% over the past five years, with the company generating a ROCE of around 20%. That makes the 2024 p/e of 24 seem more than reasonable. 

While most people define fashion as clothes and goods, luxury cars are also an important part of the wider sector. One company that both GAM’s Ramachandran and JM Finn’s Coutts like is the Italian sports car manufacturer Ferrari (NYSE: RACE). Ramachandran believes that Ferrari’s “value over volume strategy” will help it benefit from the “growing differentiation among luxury brands in the auto sector, not just on product but also on customer experience and community”. She is particularly impressed by its progress towards electrification – the first fully electric sports car is due in 2025. The fact that Ferrari has grown sales by 50% since 2017 justifies its 2024 p/e of 40.

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Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri