Chinese go crazy for luxury brands
After a challenging 2008 the Julius Baer Luxury Brands Fund has returned +44% versus MSCI World 27% in 2009 (in EUR). Since launch on 31 January 2008 the Fund is up 1.5%.
Historically, luxury stocks tend to outperform in equity market recoveries and with Christmas trading beating expectations and improved consumer confidence we can expect this pattern to be repeated. Strong brands focusing on their strengths performed especially well. For example, Richemont was up 12% in December, Burberry was up 12% in Q4 and Tiffany posted 13% sales growth for November-December.
Global wealth creation drives growth for luxury goods and when we talk about demand for these goods, we are not talking about the average consumer. In the US, for example, the top 20% of earners account for more than 60% of total US income.
As Bernard Arnault, Chairman of LVMH said, “We don’t buy our dreams at the supermarket.” Consumers are willing to pay premium prices for top brands and it is emerging market consumers who are leading the way. There is a lot of pent up demand for luxury brands, especially from China, which accounts for around 49% of luxury market growth. Consumer wealth in Russia and the Middle East is also on the up, they too are zealous for western luxury brands.
Strong pricing power for luxury goods means their prices rise faster than inflation, an attractive quality for any investment. Most luxury companies are in excellent financial shape, a clean balance sheet is not uncommon, attractive share price valuations do not reflect those strengths. We expect to see further earnings upgrades in 2010 with organic sales growth of around 5%. But more than ever, companies will need to be innovative and creative to maintain this growth. Geographical diversification will also be a benefit.
The Julius Baer Luxury Brands Fund launched on 31 January 2008 and has CHF50m AUM*. We are seeing attractive valuations in luxury stocks. Last year the Fund has returned +44%, compared to returns of +27% for the MSCI World Index. Positive performance has come from exposure to the strongest brands, which tend to gain market share in difficult times. Over the medium and long term we expect luxury stocks to outperform MSCI World Index given the growth potential and high profitability of the luxury business.
The fund’s top five holdings (as at 29 January 2010) were:
• LVMH, 6.8%
• The Swatch Group, 6.0%
• Diageo, 5.8%
• L’Oréal, 5.4%
• Richemont, 4.9%
The fund has been awarded an A rating from OBSR and is available on the Transact platform.
Key positives for the fun
• Improved consumer confidence benefited Christmas trading to better than expected levels
• The number of wealthy consumers from emerging markets, especially China, is growing fast, they are crazy for luxury brands
• Strong players are getting stronger
• Sales and earnings are expected to grow in 2010