Treat yourself to a taste of luxury this year

Kathleen Brooks
POSH frocks and designer handbags come in and out of fashion, but the companies that make them can be a prudent investment. Luxury stocks held up pretty well during the recession and there are now some signs that they will lead the pack as the global economic recovery gathers pace.

Hermes, the French designer brand, couldn’t sell enough of its famous “Kelly” bags and silk scarves in the first quarter. Sales were up more than 18 per cent and revenues are expected to grow by 9.7 per cent this year, according to analysis by S&P Equity Research. And this was merely reinforcing a trend. LVMH, the multinational that includes Louis Vuitton, along with Bulgari, both posted positive surprises in their first quarter earnings figures. This helped the Julius Baer Luxury Brands Fund outperform in the first quarter. It rose 14 per cent compared with 9 per cent for the MSCI World index.

But why should institutional investors choose luxury? There are three main reasons: firstly, luxury brands should lead the way in a cyclical economic recovery, secondly companies in the sector look financially strong, and lastly, valuations don’t look overstretched.

There is value to be had from luxury and on a price-to-earnings basis, the luxury sector is still within its recent historical ranges (see chart). “Luxury goods have had a nice run during the last 12 months, and outperformed the overall market. In general I am relived that we have seen a correction since the run-up was so extreme,” says Scilla Huang Sun, fund manager at the Julius Baer Luxury Brands fund.

A major trend for the luxury goods sector has been the growth in demand from emerging markets. The thirst for luxury western brands, in China, in particular, show no sign of abating. A weaker euro has only helped boost exports to these nations and Huang Sun expects the extra sales to boost profits in the coming months.

Luxury stocks are an attractive proposition since they occupy a unique position in the market. Not only are they highly cyclical – they tend to benefit when the stock market rises as this boosts consumer confidence– but they also have strong financial fundamentals as Huang Sun explains: “Handbags and shoes are all cash generative, this is enhanced by the fact that luxury goods companies can sell their products at a premium to inflation.” This makes luxury firms more recession-proof, and able to bolster challenging conditions.

Huang Sun’s fund invests in between 30-50 companies. The biggest sector is fashion, accessories and jewels, where more than 40 per cent of the fund is invested. The largest holdings in the fund are LVMH Moet Hennessy, which makes up more than 6 per cent of the fund. The second largest is the Swatch Group, with 5.9 per cent.

Luxury lasts, so the saying goes, but it also pays. Brands are in a strong position to outperform the overall market this year and are worth a second look.