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Shares in luxury goods giant Hermès (PA:RMS) tanked on 15 April following warnings of a sales slowdown in its key market. But despite the luxury sector facing obvious challenges, some analysts think that there is a buying opportunity for bargain-priced luxury stocks, especially if you can spot the hidden gems.
March was a choppy month for the stock market, with the direction of travel made clear by investors’ buying trends. As the Iran war shook global outlooks, investors bought up defence and energy stocks, and went cautious in a bid to protect portfolios from volatility and profit from higher oil prices.
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Since the start of the conflict in Iran, Hermès shares are down 25%.
LVMH (PA:MC) – which owns the iconic Moët & Chandon, Hennessy and Louis Vuitton brands – saw its share price fall as much as 2.7% on Wednesday, though they recovered most of these losses later in the day. But LVMH shares too are down 14% since the start of the conflict.
Why invest in luxury stocks?In normal times there is a compelling investment case for luxury goods stocks, in that they subvert many of the normal rules of economics. Higher prices, if anything, increase demand for high-end luxury goods, and while most businesses invest heavily in scaling their production as much as possible, it can reward luxury firms to keep their product lines small and their goods exclusive.
“Hermès are very good at what we call ‘capsule collections,’” said Angeline Ong, senior investment analyst at trading platform IG. “They might make 500 silkscreen printed scarves, they have a number for every one… This means that they continue to have prestige, and they have pricing power.”
(Image credit: Lexie Moreland/WWD via Getty Images)
This gives them a certain level of resilience. Raw materials costs are often a relatively small component of luxury goods pricing, so inflation doesn’t force them to raise prices. If it does, they can easily pass these on to relatively price-unconscious customers.
But because they are non-essential, falls in luxury goods sales often pre-empt a downturn in the global economy.
“At a starting price of £12,000 a pop, Hermès Birkin handbags may not be considered essential expenditure for the vast majority of the global population, but luxury goods sales are often a leading indicator of economic growth and so market watchers are paying attention,” said Wall.
Is there a buying opportunity in luxury goods?Data from market research firm Morningstar suggests that luxury stocks appear attractively priced at the moment, with two-thirds of the stocks in the sector currently trading below ‘fair value’ – perhaps understandably, given the pressure that the sector is under.
But Morningstar doesn’t expect this pressure to last too long.
“We expect limited direct impact from the conflict, with regional sales in the mid- to high-single digits for most luxury companies, although we are wary of the impact on oil prices, inflation, interest rates, GDP and markets,” said Jelena Sokolova, senior equity analyst at Morningstar.
“Based on the industry's past 30 years, periods of subdued demand didn't last more than two years,” Sokolova added. “We also believe that the moats in luxury remain intact and that fundamental growth drivers, notably potential for demand recovery from American and Chinese consumers, remain strong.”
The S&P Global Luxury Index – which consists of 80 of the world’s largest luxury goods stocks – is down 7% so far this year, but was on a strong run before the war broke out, generating a total return of 20% over the past 12 months.
How to invest in luxury goodsIf you feel confident that the luxury goods industry will bounce back from the current turmoil, there are several ways that you can invest.
You could buy individual stocks such as LVMH or Hermès.
Isabel Fairlie, equity analyst at wealth manager Charles Stanley, picks out Richemont (CFR:LISN) as a potentially durable option.
“Across the wider sector, absolute luxury has consistently outperformed aspirational brands, with hard-luxury revenues materially outpacing soft luxury over the past eight quarters,” she said. “Richemont is a direct beneficiary of this trend. Its Jewellery Maisons, including Cartier and Van Cleef & Arpels, continue to report robust growth, underpinned by sustained demand in the US, which now exceeds the size of its China business.”
If you prefer to invest in funds, you could consider Amundi Global Luxury (LON:LUXG). This exchange-traded fund tracks the S&P Global Luxury Index; top holdings (as of 14 April) include Richemont, LVMH, Hermès and Ferrari (NYSE:RACE).
Or fans of actively-managed funds could select the GAM Luxury Brands Equity Fund, which typically holds 25-35 luxury companies globally.
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