May 28, 2023

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Dazzling: Beyoncé wears a Tiffany necklace

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Luxury goods companies attract buyers with their unique charm and print. Even more attractive to investors are the bold strategies, including price hikes, that the industry is now using in the face of global economic uncertainty.

A Chanel handbag that would have cost £3,940 at the end of 2019 is now worth £6,740. Louis Vuitton, one of the 75 houses that, along with Christian Dior, Fendi, Givenchy and Tiffany, form the LVMH empire, has also made some bags more expensive.

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Watches of Switzerland, a retailer of Rolex and other prestigious watches, is moving into a Bond Street store eight times the size of its current West End store.

These moves and more show confidence – some analysts see these ventures as the European equivalent of Apple and other US tech giants. The strong recent results underline the luxury titans’ trust in the power of pricing, which is essential when inflation is soaring.

But despite this audacity, the stock market’s assessment of the prospects is pessimistic.

The S&P Global Luxury Index, which includes Hermes, the owner of Gucci Kering, LVMH and Richemont, the Cartier group and Jaeger-LeCoultre, has fallen 25% since the beginning of 2022.

This is partly due to concerns about lockdowns in China, which accounts for about 80% of global spending on handbags, jewelry, perfumes and watches. Before the pandemic, about a third of those purchases were made outside of China, but Gen Z shoppers who love Burberry and Gucci are suffering from travel bans and unemployment.

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Luxury brands may not suit you. But you have already bet on them if you have money in many funds and mutual funds.

BlackRock European Dynamic, Brunner, Fundsmith, Law Debenture and Witan own LVMH. Finsbury Growth & Income and Lindsell Train UK Equity own stakes in Burberry; while Smithson endorses Moncler, known for their £1,200 quilted coats.

Diageo, owner of a number of premium spirits brands, is a member of the Lindsell Train Global Equity fund. F&C and Monks own Richemont, which recently fought off an attack by activist investors.

As an investor in Fundsmith and Smithson, I am concerned about the luxury groups’ ability to weather a prolonged recession.

But I tend to rely on their commercial sense and creativity. As with previous downturns, there can be a lot of “cross-category indulgence” where luxury lovers stay true to a brand but buy cheaper items.

Marcus Morris-Ayton, manager of the Brunner Trust, says: “Past downturns have shown that luxury demand tends to be more resilient than other areas of discretionary spending. Simply put, the wealthy are more immune to cost of living pressures.”

He credits LVMH’s brands with tremendous pricing power, saying, “In a recession, LVMH has historically benefited from its loyal customer base and best-in-class brand portfolio.”

And during the financial crisis of 2008, LVMH’s Fashion & Leather division saw sales and profits rise, which now accounts for three-quarters of profits.

Marcel Stoetzel of Fidelity European Trust says LVMH could limit supply by supporting prices. He adds: “In some categories, such as champagne and cognac, production is limited or cannot be changed quickly, and this further increases pricing power.”

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The luxury titans will try to make the most of their pricing power and size. Rebecca Irvine of US fund manager PGIM Jennison says, “Scale has advantages in marketing, in getting the best real estate, in hiring the best people, in sharing best practices.”

As a result, the sector grew by 17% in the first six months of the year.

Claudia D’Arpizio and Federica Levato of consultancy Bain predict the market could be €360-380bn (£315bn-£332bn) by 2025, up from €288bn (£252bn) in 2021. worldwide cautious, this figure will be 305-320 billion euros (267-280 billion pounds).

Levato says firms are “reshaping their future” and improving the online experience.

Irvine points out that American men are more luxury conscious, with cities like Miami, Austin and Denver a source of demand. Particular attention is paid to sustainable products for younger and environmentally conscious customers.

Falling luxury stocks mean they seem reassuringly inexpensive. Buying them is a play on the belief that the rich will always be different and will not be bothered by economic turmoil.

I suspect it will take the markets some time to be convinced of this.