A luxury everyone should afford
Looking for a long-term investment that can withstand the economic turmoil? Well, consider luxury!
Marketwise, a year never resembles the previous one. The last five years have been subject to many headwinds: Covid-19, Ukraine-Russia conflict, rising interest rates, inflation, etc. Finding a sector, an investment that resists and performs during these different and multiple periods of shocks is difficult.
Luxury might be a good candidate. We like this sector for its all-terrain characteristics, its resilience and adaptability.
On the European market, luxury is gradually establishing itself as a major sector and is gaining in importance. It now represents 19% of the French CAC40 index and LVMH has become the largest European company with a market capitalization of EUR396 billion at the end of February. Luxury got off to a flying start in January, riding on the current optimism on China. Indeed, the Chinese Economy showed a strong rebound which bodes well for luxury stocks. China’s manufacturing purchasing managers’ index rose to its highest level since April 2012.
The luxury sector is vast and its definitions are multiple, which adds a layer of complexity and confusion. This is why one must remain selective and focus on the major luxury players that sailed on headwinds. We no longer need to demonstrate the quality of their balance sheets, their ability to report higher results and double-digit margins year after year and their success in offsetting one region with another. Their scale brings them access to the best designers and increasingly to celebrities.
For example, let’s have a look at an equally weighted portfolio composed of 4 large and well-known listed luxury companies. First component, LVMH the most diversified group active in soft luxury (clothes, shoes, leather goods, etc.), hard luxury (watches and jewellery), perfumes and cosmetics, wines, hotels, and more, then Hermès, active in soft luxury, Cie Financière Richemont in hard luxury, and finally Estée Lauder in cosmetics and beauty, the latter being more defensive by nature. The dollar-based basket composed of these 4 equally weighted stocks has outperformed the MSCI World, as well as the 11 Global Industry Classification Standard (GICS) sectors over the last 5 years.
Most luxury stock prices are at all-time high. What about the future? Today the valuation multiples are high but appear reasonable, as the estimated Return on Equity and Earning per share are higher for the luxury basket presented than for any sectors. Its fundamentals remain sound and intact, as China brings some good hope. Additionally, one should keep in mind that inflation is still present and that luxury companies have strong pricing power, as demand for luxury goods is fairly inelastic to price. This means that they can protect their margins. But what would happen to the luxury sector in times of recession? The sector’s consumer base is wider spread and less sensitive to economic slowdown than most and it benefits from a simultaneously defensive and growth profile. In other words, the sector is able to grow profits whatever the economy throws at it. In order to capture the right moment, one entry signal to watch closely is the luxury premium. After shooting up, the premium has fallen back to historical levels, so now could be a good buying opportunity.
It is quite impossible to predict the coming year, but one thing is certain: investing in luxury and adding on/doubling down on this investment on eventual corrections seems to be an interesting strategy.
“Luxury will be always around, no matter what happens in the world”. Carolina Herrera
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