Affluent individuals around the world bucked the depressed market norms of the last few years and managed to keep the luxury goods market bustling by investing in alternatives such as art, wine and supercars.
Companies such as Hermès SA, Michael Kors Holdings Ltd. and LVMH Moët Hennessy Louis Vuitton SA are gaining new customers daily, with 10 million new buyers wading into the market each year.
Many of these companies have given good news to shareholders recently, including luxury goods dynamo Michael Kors – known for its footwear, watches and clothing – whose shares soared 17.3 per cent to $89.91 (U.S.) in early February, after the company’s report of higher-than-expected profits.
Investors don’t necessarily need to buy stock in a luxury apparel or car company. Indeed, consumer discretionary funds, which deal in non-essential goods, are another way to add bling to one’s portfolio. Funds such as these include iShares S&P Global Consumer Discretionary ETF, PowerShares Dynamic Consumer Discretionary ETF and Vanguard Consumer Discretionary ETF. The level of exposure and whether it includes domestic or international brands will depend on the fund, so some research is required.
According to the Bain & Co. report Lens on the Worldwide Luxury Consumer, there are 330 million luxury consumers in the world today, more than triple the number of two decades ago, and they spent $300-billion (U.S.) last year alone. More than one third of these consumers are in emerging markets, and 50 million of those are in China.
Perhaps surprisingly, the cash-strapped United States still reigns supreme as the largest consumer of luxury goods in the world, accounting for a quarter of all sales of luxury bags and watches.
Fine art, vintage wine and pristine classic cars are also popular and sought after by the ultra-high-net-worth set, no matter what the economic climate.
The Objects of Desire Index, published by private banking firm Coutts in January, reported that luxury assets – so-called passion investments – have risen 77 per cent since 2005, outperforming shares. Between 2005 and 2013, classic cars rose 256 per cent and jewels jumped 146 per cent.
“The benefit is more than just profit,” noted Mohammad Kamal Syed, head of strategic solutions at Coutts. “Owners can bond with like-minded people in an elite network, with assets offering escapism and a chance to re-enact history.”
Motivations for these passion purchases range from portfolio diversification to escapism to pure indulgence. The wealthy in China are fuelled by new money and the need for bling, while the emotional or aspirational pull toward luxury goods remains a strong motivation for many investors.
“This market of greater Asia, beyond Japan, is a very robust and growing market,” says Milton Pedraza, chief executive officer of the Luxury Institute.
These consumers want to spend and show off their purchases, and the very definition of luxury is that it is above and beyond necessity. But make no mistake, this is still an investment.
“A lot of these people are going from capital creation to capital preservation,” says Mr. Pedraza, “and it’s a way to store value.”
“Besides their aesthetic value, the design, the craftsmanship, the quality, these pieces very often are art … [and] many of these are one of a kind or limited edition pieces that will not only hold their value but may increase in value over time,” he explains.
The United States, Europe and Japan are considered the established luxury item buyers, but China now accounts for almost 30 per cent of the global market. Chinese consumers are also boosting luxury markets beyond their borders, according to the Bain & Company report, which said that 67 per cent of all Chinese luxury purchases in 2013 were made overseas.
While the Bain report showed that growth in China’s luxury goods market slowed to 2 per cent in 2013 from 7 per cent in the previous year, this emerging market is still making positive impacts on the global sector – and in some cases buoying it.
“In fact, the only thing that’s holding Europe’s luxury [market] up is the fact that they have so many Chinese visitors,” explains Mr. Pedraza.
But it may not be all about handbags and fancy watches in years to come, he says. Experiential items such as dining, entertainment and great accommodation will also be coveted. “People are going after experiences more than they’re going after goods,” he says.
Investors can tap directly into luxury hotels, especially names that have a high-end presence in China, such as U.S.-based Hyatt Hotels Corp. Resorts that include experiences are another option, such as U.S.-based Intrawest Resorts Holdings Inc.
Some funds capture that experiential element, such as the Claymore/Robb Report Global Luxury Index ETF, through its investments in developed-market companies whose primary business is the provision of global luxury goods and services, including travel and leisure. Another option is the Powershares Dynamic Leisure And Entertainment Portfolio.
But observers warn the luxury goods and services sector must make an effort to retain its more traditional consumers as these other markets emerge.
Future luxury consumers will be a mix of the traditional and new buyers, according to the Bain report, and many long-time customers are already not spending as much as they did a few years ago.
Wynn Harvey, vice-president, investment adviser, Richardson GMP, works with both high-net and ultra-high-net-worth individuals and her clients tend to be the more traditional luxury consumer. She says despite the gap in wealth between the high-net ($1-million-plus in assets) and ultra-high-net ($50-million-plus in assets) individual, their luxury spending behaviours are comparable, especially during times of economic uncertainty. “Everyone seems to be similar in that it’s about preserving and protecting their wealth,” she explains. They may maintain a certain lifestyle but pull back on spending in down times. “It’s about risk management.”
More traditional, conservative luxury consumers are not drawn to luxury apparel or timepieces. For them, it’s about compensation for hard work says Sandra Abley, senior manager and high-net-worth planner at TD Wealth.
Her clients are mostly men in their 60s, 70s and 80s, and “what they like to collect are boats, boat houses, cars and vacation homes,” she says.
In her opinion, these investments are not financially motivated because they generally don’t have a high rate of appreciation, but they are aspirational investments, a sort of reward.
They are going to depreciate in value, she says, “but they don’t mind because they’ve spent … most of their lives working really, really hard building up their business. [Now] they have lots of time to spend with their family.”