Luxury is a resilient growth industry in the age of inflation Luxury is a resilient growth industry in the age of inflation Luxury is a resilient growth industry in the age of inflation

Luxury is a resilient growth industry in the age of inflation

Peter Garnry

Head of Equity Strategy

Summary:  Europe might have lost the rise of technology to the US, but instead the continent can boast of a luxury industry that is fast growing, high margin, has strong brand recognition, and has a strong appeal among the consumer. Investors can invest in the luxury industry through many different ETFs and while it is a good starting point, many of these ETFs provide exposure to many non-luxury stocks. Based on our own research we have identified 23 stocks that provides the best pure exposure to the global luxury market. These companies represent high growth, high margins, and a resilient business despite high inflation and economic uncertainty.

Europe’s most interesting growth segment outside pharmaceuticals

Since 2008 the US technology sector has conquered world markets and lifting US equity markets significantly above the rest of the world. Many of the US technology companies became iconic brands and offer products the global consumer and companies must have. Europe lost the technology war on the grand scale and while the green technology might be the once in decade opportunity for Europe, the continent has had one engine besides its influential pharmaceutical industry and that is the luxury industry.

While not as dominant a factor in equity markets as US technology each of the four largest luxury companies in our luxury equity theme basket have a market value above $100bn so it is beginning to be a sizeable weight in European equity indices. Just like the US technology brands, luxury companies have strong brands and high margins reflecting scalable and intangible-driven business models. The absolute king of the global luxury industry is the French giant LVMH which has been a success story over three decades now delivering 14.1% annualised returns including reinvestment of dividends since October 1989 or equivalent of a total return of 7,974%. If the US dominant in information technology then Europe dominates in luxury.

LVMH share price | Source: Saxo

Saxo’s luxury equity theme basket

There are many different ETFs tracking the luxury industry globally and in Europe, but we looked at these ETFs we were surprised about how many stocks were in those baskets that were not truly luxury. Take the Amundi S&P Global Luxury UCITS ETF where you find Tesla, Mercedes, Estee Lauder, Diageo, and Pernod Ricard among the top 10 holdings. While these companies have products that do sell to the 1% or 0.1% of this world their main revenue stream comes from products that are sold mass market to the middle class.

We did our own research and have isolated the following 23 publicly listed companies as the ones that best represent pure exposure to the luxury segment. The 23 companies represent a total market value of $1.19trn with LVMH dominating the industry on most parameters. Despite an interest rate shock, inflation and economic uncertainty, these companies have grown revenue 21% over the past year and the median EBIT margin among these companies is 13.5%, while the average EBIT margin among the 10 largest luxury companies is 24.1%. The recent rally in luxury stocks have taken many analysts by surprise reflected in price targets for the 10 largest luxury stocks being higher only slightly above the current share price or even below which is quite unusual. If look at equity returns over a five year period we only observe the big three, LVMH, Hermes, and Christian Dior has delivered the greatest returns. It pays to be big in luxury.

But what is luxury? There are many definitions and many of the companies we have researched call them luxury but being cynical many of them have a shade of luxury but their pricing reflect that their products are within reach of the middle class. Our definition of luxury is that it is a product mostly people in the upper class can afford on a regular basis. The Global Fashion & Luxury Private Equity and Investors Survey 2021 report from Deloitte is an interesting read and on page five in the report there is a good illustration of the luxury industry across the different categories. Luxury cars are by far the biggest segment and our basket provides exposure to this segment with Porsche, Ferrari, Aston Martin. Another feature in the overall luxury sector is the relatively high concentration which is a trend industry experts forecast to continue driven by M&A activity. LVMH has been built on an aggressive M&A machine over three decades spanning almost the entire value chain of luxury products.

Source: Deloitte

Investors are betting on luxury stocks in China reopening trade

China’s pivot on its zero Covid policy has ignited the China reopening trade with equity flows into Chinese equities picking up speed already in mid-December last year and has continued this year. While commodities, freight rates, and other indicators linked to Chinese growth are still not responding in a way that signal Chinese growth is picking up, investors are putting on the Chine reopening trade in indirect ways through betting on luxury. If the Chinese economy is roaring ahead the wealthy individuals of China are expected to increase their spending on luxury goods.

Our luxury equity theme basket was up 18% in January and has continued up in February reflecting a massive inflow from investors betting on the economy will reaccelerate and that wealthy Chinese will increase their spending on luxury. While the trade makes sense for foreign investors that are hesitant in adding too much exposure to Chinese equities. Luxury stocks have another interesting feature for investors which is that they are a quite resilient despite inflation as wealthy individuals are less sensitive to the economic cycle and inflation which means that they can maintain their spending power unlike the rest of the population. Hermes reported Q4 earnings this morning beating estimates on revenue which grew 23% y/y in constant currency terms reflecting high and robust growth. Hermes also said that they had lifted prices globally by 7% compared to a year ago reflecting the ability to pass on inflation to their customers.


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