Asian Plutocrats Drive Luxury Boom

05/30/2011 8:00 am EST


Eoin Treacy

Global Strategist,

Many US and European luxury stocks are up 50% or more over the last year, and Western food concerns are benefiting too, as Asia grows a paunch under its Burberry coat, writes Eoin Treacy of Fullermoney.

According to a recent report from Deutsche Bank, over the next decade, “there is going to be an explosion in the number of people in their 50s—peak earning-power years in hierarchical Asia.”

“This is a continuation of what happened in the past decade,” write Ajay Kapur, Priscilla Luk and Ritesh Samadhiya. “Luxury products and luxury property are already huge beneficiaries of these high earning empty-nesters. They are likely to continue to prosper.

“The region's income inequality only reinforces this theme. This idea is better played by buying the global plutonomy brands, rather than the Asian brands, given the valuation differentials.”

The global population is growing at approximately 1% a year, and the global economy is growing at approximately 3%. The world's population centers are growing considerably faster.

So what, you might say—China and India have always had considerably larger populations than just about anywhere else, so what is different this time?

China in particular has embraced capitalism, albeit with Chinese characteristics. India, despite bureaucratic inertia, is doing the same. Standards of economic, civil, and corporate governance are improving.

For the first time in living memory, not only are these economies expanding, but a clear path of social advancement is opening up for hundreds of millions of people. It’s the American dream with Asian characteristics.

As standards of living improve, per-capita consumption of just about all goods and services increases. Over the last decade, China has been building cities, roads, railways, airports, power stations, sewers, water treatment facilities, and industry.

China's people have benefited enormously from this investment and the accompanying economic growth. The number of people in the middle classes has swollen considerably. Their appetite for a higher standard of living is undiminished, and has been a boon for globally oriented companies offering goods and services previously beyond the reach of most people.

A performance screen of a selection of 16 luxury brands exhibits a high degree of commonality, with almost all shares trending relatively consistently, and finding support in the region of their respective 200-day moving averages during periods of consolidation.

[Of the 16 stocks, Burberry Group (London: BRBY) and Bulgari (Milan: BUL, OTC: BULIF) have more than doubled in value in a year, while Luxottica (LUX) looks up at the field with a gain of 12% over that span. The median 12-month gain for the group is nearly 50%—Editor.]

Global food companies with a strong Asian presence also share this characteristic. Nestle (OTC: NSRGY, Zurich: NESN), Unilever (UL, UN), Associated British Foods (OTC: ASBFY, London: ABF), Heinz (HNZ), Kraft (KFT) and General Mills (GIS) all share positions of relative outperformance.

Automobile manufacturers, at the low end and high end of the spectrum, are also outperforming. Many of these shares are currently somewhat overextended, relative to their respective means, and would be best bought following reversions.

The emergence of literally hundreds of millions of people with considerably more disposable income is helping to drive bull markets for companies capable of supplying them with what they want and need.

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