Emerging markets to drive growth in luxury spending

The wealthy are back in the mood for spending and luxury sales are improving quarter by quarter. 

High-end US department stores’ monthly sales are rising again and beating market expectations. LVMH’s star brand Louis Vuitton saw double-digit returns in the first quarter of 2010. Their cognac and champagne business did even better growing by 20% and the watch brands including Tag Heuer, Zenith, and Hublot, rose 34%.

Swatch group had the best February in its history with their best brands all up; Breguet by 46%, Blancpain 48%, Omega 50%, and Longines 49%.

Watch retailers around the globe are ordering again, having reduced inventories significantly last year. While an improvement in the luxury market was anticipated, especially given the low comparison base from last year, the rebound is stronger than expected.

After more than a year of modest discretionary spending people desire something new. Last year, the global recession, rising unemployment and falling equity markets dampened the lust for spending. Unemployment remains elevated and household debt is still high, but it is not the average consumer that counts when it comes to luxury spending. In the US for example, 60% of income is earned by the top 20% households.

Luxury spending in the US has surprised on the upside since the beginning of this year and there is a clear link between equity markets and consumer spending. Last spring, people felt less wealthy and were not in spending mode. The S&P 500 is now up about 70% from its lows a year ago and many people are close or back to pre-crisis wealth levels. Luxury stocks usually outperform in a recovery and this has proved to be the case again.

We expect the luxury industry to grow further this year. Growth is mainly driven by emerging markets, particularly in China where the luxury industry is booming, driven by increasing wealth and a strong affection for Western luxury brands.

Half of industry growth today is contributed by the Chinese and the majority of new luxury stores today are opened in Asia. Many luxury companies have very strong financials and never stopped investing in these promising markets. As wealth creation in emerging markets continues, high demand for luxury goods will remain in years to come.

When investing in luxury companies the motto ‘the winners take it all’ rings true. We believe investors should focus on strong brands with heritage, good management and solid finances, in other words, companies that can gain market share and remain profitable even in a difficult environment. The biggest positions in our Luxury Brands fund are LVMH, Swatch, Diageo, Richemont and Tiffany.