Investing in Luxury Investing in Luxury Investing in Luxury

Investing in Luxury

Peter Siks

Summary:  There are certain sectors that have an unique appeal to investors. One of them is ‘luxury’. But is it worthwhile investing in luxury or should this also be only ‘for the happy few’? In this article you can read how this sector has performed, how you can gain exposure to this segment and other factors to consider before investing in luxury.


What is ‘luxury’?

Luxury stocks can be defined as stocks of companies that sell high-end, premium goods and services that are considered non-essential, yet desirable. Some examples are watches, cars, diamonds, leather goods, fashion, perfume and wine. There are some key characteristics of luxury stocks.

  • Association with exclusivity, high quality, and prestige. Luxury brands cultivate an aura of exclusivity and prestige around their products.
  • High price points. Luxury goods are priced significantly above non-luxury alternatives. Luxury brands do not compete on price.
  • Focus on heritage, craftsmanship, and tradition. Luxury brands emphasize their history, provenance, and traditional production methods.
  • Influence on culture and consumers. Luxury brands shape aspirations and consumer desires. Owning luxury goods signals status.
  • Investment in innovation to uphold product quality. Luxury brands continually innovate while preserving brand heritage.
  • Manufacturing in place of origin. Luxury production is often centered in the historical or cultural birthplace of the brand.

So in summary, luxury stocks are stocks of companies that deal in non-essential yet prestigious and desirable goods and services, with a focus on heritage, quality, and exclusivity. What also should be taken into account is the fact that luxury is a relative concept. For a large number of people around the world, Nike can be regarded as a luxury brand, where others would label Nike a mainstream brand.

How to gain exposure to luxury

One of the pillars of success in investing is diversification. This also applies to luxury and the easiest way to gain exposure to the theme luxury would be to buy a luxury ETF. This ETF consists of several luxury stocks and as an investor you achieve very easy exposure to the luxury theme. The one available on the Saxo platform is Amundi S&P Global Luxury UCITS ETF. If you would dive a little bit deeper into this ETF you will find companies that might not meet your criteria for being called ‘Luxury’. Below you will find the top 10 holdings of the Amundi S&P Global Luxury UCITS ETF.

So, if you are comfortable with this list of top 10 holdings, this ETF might be suitable for you. If you are not comfortable with this list, another approach could be to create your own selection of stocks that can be considered luxury stocks. Why? Because diversifying within the luxury theme will reduce your risk. Below you will find some stocks (and some of the sub-brands part of them) for inspiration.

  • Hermes Hermes
  • LVMH Louis Vuitton, Moët & Chandon and Givenchy
  • Tapestry Jimmy Choo, Versace, and Michael Kors
  • Burberry Burberry sub-brands
  • Compagnie Financiere de Richemont Cartier, Montblanc and Piaget
  • Moncler Stone Island and Moncler
  • Ferrari Ferrari
  • Prada Prada, Miu Miu and Church’s
  • Porsche Porsche

Performance

In spite of the air around luxury products of wealth, success and high end quality, this is not the case for all the investments made in this theme. If you would look to the five year performance of the names mentioned above it is not all glitter and glamor.

To get some context of how prices have developed over the last 5 years (prices 14th November 2023):

  1. Nasdaq 100 (QQQ)+ 127%
  2. Amundi S&P Global Luxury UCITS ETF+ 69%
  3. S&P 500 index(SPY)+ 61%

The clear winners within the luxury theme over the last 5 years were:

  1. Hermes+ 282%
  2. Ferrari+ 231%
  3. LVMH+ 161%

On the downside the five year performance was negative for:

  1. Tapestry- 30%
  2. Porsche - 22%
  3. Burberry- 5%

In short, the luxury theme (ETF) has outperformed the S&P 500 index over the last 5 years but fell short in comparison to the Technology-index Nasdaq 100. The performance in individual luxury shares ranged from -30% to + 277% and this emphasis the importance of selecting the right stock.

Current valuation

In the table below you find some ratios about the current valuation. Remarkable is that the winners of the last 5 years have – if we believe the consensus among analysts – have the smallest upside potential (last column). Also from a P/E perspective they seem to be expensive (P/E close to 50). This raises the one million dollar question if these companies will be able to maintain their performance of the last five years. Looking at the essence of luxury goods – scarce und ultra-high quality – they seem to be in the right place but valuations appear to be stretched for these two brands.

In practice

If you are considering to invest in the theme “Luxury Goods” there are some guidelines to take into account:

  • Make sure that you diversify enough; either through the ETF or via several luxury companies
  • Invest in established luxury brands with heritage and history;
  • Look for luxury brands that invest in innovation to stay relevant while maintaining their aura of exclusivity;
  • Luxury brands are able to command premium pricing, which can lead to higher profit margins. However, be wary of brands that expand too quickly or dilute their exclusivity;
  • Consider luxury brand companies that influence culture and have loyal customer bases, as this can indicate pricing power and resilient demand;
  • Factor in that the luxury market tends to be more resilient in economic downturns, as their affluent customer base is less impacted;

Conclusion

In summary, investing in established luxury brands with heritage, innovation and cultural influence can add diversification to a portfolio over the long-term. But careful analysis of brand strength and valuations is needed when investing in this segment. What helps to reduce risk is to choose several companies (or the ETF) within this segment.

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