Opportunities and Pitfalls in Luxury Sector

10/28/2013 12:00 pm EST


Like all others, the luxury sector offers plenty of opportunities for profit, however, if you are looking to invest in luxury items, you also have to watch out for risks, especially given the recent developments in the US and China, writes Andrew Scott, of The National.

Luxury has long been a goal of the business life. It can also be a means to achieve that end.

Diego Wuergler, private bank Julius Baer's head of investment advisory, sees the luxury sector as a gilt-edged opportunity.

Mr. Wuergler says sales in the sector is expected to outpace average GDP growth by twofold—or at an annual rate of eight to 10%. And, as profits in the sector outstrip sales growth, the shares of luxury good firms could rise by 10 to 15% a year.

Furthermore, the economic ascent of China's middle class drives the belief that the luxury sector would continue its strong performance. That, in turn, has given rise to the perception that Asian consumers will demand products that transcend functionality and signify lifestyle choices and aspirations. Indeed, the power of brands and the emotional connection to them are key in driving sales.

“The provenance of a brand is the reason you buy something, the brand that resonates with you” says Antonia Ward, the head of advisory services at consumer research firm Stylus.com.

“You have markets that are interested in conspicuous consumption, you have markets with an emerging middle class with a new set of disposable incomes.

“They want to invest in products that have a personal resonance and also buys into a global industry.

“You are a citizen of the world if you buy a Rolex. That's what that means to that person, and everyone knows what it means to own a Rolex.”

Consumer demand for luxury products is a global phenomenon, with vintage cars and artworks providing stellar returns for investors.

Since 2003, the “valuables index” of The Economist magazine has surged 211% in nominal terms and by 54% since the first quarter of 2009.

In comparison, the MSCI World Index, a gauge of share markets in developed economies, has risen by 147% since 2003.

However, buying valuable objects requires a different skill to that for stock investments.

“Vintage cars have basically doubled in price every year, which is outstanding compared with the stock market,” Mr. Wuergler says.

“But the advantage of the stock market is that it is liquid, and reflects all public information and therefore transparent from a pricing point of view.

“With a vintage car or art, if you are not an expert, it is very difficult to know whether you are getting a good deal or not.

“So if you are an expert, you can afford to go outside the financial market. But that is why investors stick to the equity market, which is easy, efficient, and transparent.”

This year, the Dow Jones Industrial Average index in the United States reached an all-time high on the back of the Federal Reserve's quantitative easing program. That has led many to wonder whether stock markets would slow when the monetary reins are tightened.

This would temper the belief that declines in the share prices of luxury products firms could well be opportunities for long-term investment.

However, Ms. Ward, of Stylus.com, says there is massive untapped potential for luxury firms to exploit the middle class's desire for such products, even as the market is becoming increasingly differentiated.

“There will be global brands that can exploit that market for many years to come,” she says. “In China, the population is so massive that the old brands will still have the cachet, because that is exactly what they have based themselves in—being exclusive, being beyond the reach of most, and working the economics of supply and demand.”

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