If you live in Japan and you want to buy a Hermès Birkin handbag you’ll need to be patient. The waiting list for the bag is two years long.
Not everybody has the £18,000 necessary to buy a crocodile version of one of the world’s most iconic bags, but the number of those who do is expanding rapidly.
The good news is that even if you have yet to join the ranks of the superwealthy, you can still benefit from their good fortune. Shares in luxury brands are growing at a record pace and industry experts say they show no sign of slowing down.
Across the globe people are getting richer. The number of individuals with more than $30m to their name grew by 10 per cent between 2004 and 2005, according to Citigroup. And not only is the number of millionaires multiplying at a dizzying speed, the gap between those at the highest and lowest ends of the economic scale is also growing ever wider.
The reason for this, according to Walker Crips fund manager Jan Luthman, is a series of asset price bubbles that have grown without the usual accompaniment of increased consumer price inflation and wage inflation.
“In a real sense those who have assets, whether it’s a house or a portfolio of equities, have become wealthier because the wages of our fellow citizens have not gone up by a similar amount and neither have the costs of goods and services,” he says.
“There is a huge amount of liquidity sloshing around western markets so if you have assets it isn’t hard to make money but it can be hard to make a living if you are an artisan. This is one of the effects of globalisation. Those with certain skills gain a great deal, while others are subject to the pressures of economic migration.”
As the spending power at the top end of the scale grows so too has their appetite for the finer things in life. Sales of expensive cars, precious stones and designer accessories have increased across the world.
If you want to benefit from this trend as an investor Luthman recommends looking out for the retailers, holiday operators and housebuilders who cater towards the top end of the market. Alternatively you could look into putting money in a specific fund such as the Pictet Premium Brands fund.
“There are quite a few stocks that we feel really confident about in this sector, and it’s an area that we have been following for a while now,” says Philip Watson, head of the Investment Analysis & Advice Group at Citigroup private bank.
Alex Bell, chief executive of Dominion funds, says an added benefit of investment in the luxury brands sector is the natural diversification it affords. The companies involved straddle a variety of sectors and geographical locations.
Companies in this sector include household names such LVMH, Burberry, Porsche, Hermès, Tiffany and BMW so private investors don’t have to spend a great deal of time getting their heads around what they do. The companies tend to be mid-cap stocks, with market capitalisations between $3.5bn and $20bn. And the majority are based in continental Europe.
The performance of some has been extremely strong. Burberry’s revenues rose 19 per cent in the second half of 2006 compared with the previous year. LVMH, which owns Krug and Moët champagnes, Dior and Louis Vuitton, reported a 30 per cent rise in full-year net profits this February.
Watson says the industry has the added benefit of being able to recover from losses in a relatively short period of time. The average time a company in Citigroup’s “plutonomy” basket took to recover losses is five months, compared with an index average of 45 months.
Such strong growth attracts healthy share prices with many companies in this sector trading on high price/earnings multiples. Burberry is trading on a forward p/e multiple of 20.4 times for 2008, according to HSBC. And according to Citigroup the sector average p/e is a fairly racy 24.69. By comparison the S&P 500 has an average p/e of 17.64.
Analysts argue that in many cases these above average p/es are worth paying. Luxury goods are just as much about status as they are about quality and exclusivity and their demand tends to be relatively stable.
Companies in this sector are often able to pass through price increases irrespective of their stage in the market cycle. And most importantly there are a multitude of changes at a macro level to support the growth in these stocks, in particular the growth in demand from Asia which is creating new millionaires daily.
