When markets go nowhere fast, investors turn to more unconventional assets in the hope of wealth appreciation. Tangible assets such as real estate, wine, art and luxury goods can often get overlooked in good times, but their appeal improves when traditional investments stagnate.
18 August 2016
True luxury goods can hold their own even in tough economic times, as great products always attract willing buyers. The heritage brand Hermes is a fantastic example. Founded in 1837 in France, its handbags retail from a few thousand pounds into the tens of thousands as the leathers become more lavish and the trimmings more opulent. Big sums for small purses. The waiting lists for these bags stretches to years, but a dedicated cult following of fashionistas, royals and celebrities ensures a loyal client base around the globe.
Once considered frivolous purchases, luxury handbags are now holding their own as savvy investments, outpacing both equities and bonds. Rare bags are selling at auction with huge uplifts on their original purchase prices. One iconic Hermes Birkin bags was sold by Christies for USD 89,106 at a Hong Kong auction last year, while another of the house’s iconic designs, the Kelly, fetched USD 42,123 – both figures hugely above the original prices.
Both models feature among the top constituents of the Rare Handbag Index, which has produced an average annual increase of 7.8% per annum between 2004 and February 2016 in US dollar terms, although the Chanel 2.55 Medium Classic Flap Bag led the pack with an annualised increase of 10.6% over the same period. Meanwhile, equities, as measured by the MSCI World Index, managed 6.0%, bonds gained 3.7%, according to the Barclays Global Aggregate Bond Index, and cash has languished in the zero interest rate environment.
Owning the bags as physical assets is one way of capturing the trend, although the market is awash with fakes and a minefield for the novice investor. Similarly, physical assets need to be treated as just that – investment bags cannot be used as they only appreciate when in mint condition.
Another option is investing in the shares of the leading names. We see value in the highly aspirational names, such as Louis Vuitton, alongside Hermes, while Gucci seems to be having a real revival. Looking beyond bags at the broader luxury goods market, high-end sportswear worn as streetwear has become the preferred off-duty attire for a broad spectrum of consumers – from teens to city professionals. The trainer has never been so coveted, to the delight of Adidas, which is enjoying a fresh wave of interest in the US, while Nike remains a global favourite.
In emerging markets, the desire to replicate the Western lifestyle seen on TV and social media is boosting demand for cosmetics from global names like L’Oreal. Make-up and skin care are priced for the masses, providing an affordable take-home luxury, with interest from men also rising.
As much as innovative design and cutting-edge marketing are required to ensure consumer appeal, a healthy focus on cost discipline is essential to keep a company’s investors happy. After years of retail expansion, brands are switching their focus to e-commerce. Many companies are looking to close or relocate non-profitable stores in favour of investing in their digital infrastructure to drive online sales. Lower levels of bricks-and-mortar spend means more free cash flow can be returned to shareholders, as debt levels remain low for most luxury companies.
Not all players have been recent winners though – consumers remain very selective in how they spend, reflecting economic constraints. The excessive negative sentiment toward the watch and jewellery sector is bringing stocks like Swatch, Richemont and Tiffany back down to attractive price points, especially given the high barriers to entry within the sector and its long-term growth potential. Global macroeconomic volatility is supporting more defensive names like chocolate maker Lindt and premium spirits producer Remy Cointreau, whose business in China has notably improved.
Strong brands remain desirable and the sector has made some smart changes to optimise business models and ensure constant evolution and long-term success. Classic luxury goods stocks have room for valuation appreciation, while the ‘selfie generation’ is ramping up demand for innovation, accessible and affordable offerings. They want to have fun on social media and look good while they’re at it. Following a couple of tough years, the sector has priced in a lot of bad news. Any improvement in global macroeconomics and subsequent sales uplifts should therefore have a disproportionately positive impact on corporate profits as leaner business models and savvy retailing approaches prove their worth.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.