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Luxury lines

Consumer sectors seem to be an area that many fund managers are avoiding although one consumption sub-sector still attracting investors is luxury goods.

There is plenty of crossover within the consumer sectors but a brief look at weightings to this area of the market shows that UK equity funds in general seem light to their exposure.

Based on factsheet data on Financial Expressat February 24, just 95 funds out of 310 have weightings of 10 per cent or more exposure to consumer product sectors. The area most favoured seems to be consumer goods, where 78 have 10 per cent or higher invested, six of which had over 15 per cent. Jupiter and Invesco Perpetual UK growth funds have 18.4 and 15.4 per cent in this area of the market while Fidelity’s UK aggressive fund has 17 per cent.

The Jupiter UK growth fund has two consumer sectors among its top three sectoral positions and it also features some luxury goods companies among its top 10 stocks – BMW and Adidas-Salomon. Manager Ian McVeigh says stocks such as these are more targeted towards the growing middle-class consumption in emerging markets rather than the top-end wealthy. “We also think one of our other holdings, Apple Computers, could be a big beneficiary of China’s demand for global brands,” he says.

It is this emerging market demand that is creating a buoyant outlook for luxury goods despite the climate of rising inflation.

Andrea Gerst, co-manager of the Swiss & Global Asset Management-managed JB luxury brands fund, says she does not discount the driving strength of regions such as China on luxury goods. She also does not believe the growing inflation issues will pose much of a drag, noting that many luxury providers with strong brands have greater scope than most to pass any price increases through to the consumer. “Few sectors have as much pricing power,” she says.

Gerst also says that Asia is experiencing rising wage growth so consumers are starting to be able to afford more.

Yet, even with the trend of rising wealth, to the average person, it seems unlikely that workers in emerging regions can afford luxury brands, especially when so few of us can afford them ourselves. However, Gerst says many young people in China live at home and have no cost of living so they can afford to spend a month’s salary on a luxury product. Still, luxury goods are so expensive that for now the bulk of business is coming only from the very wealthy – a small part of the population. However, Gerst points out a small part of a population such as China’s is quite considerable. “There are more millionaires in China than in countries like France,” she says.

The cultural and gender-specific trends which managers must consider are interesting. Gerst says in China, Japan and Korea, branded products sell well, particularly watches and jewellery, while Russians have a preference for branded cosmetics.

In the West, it tends to be women who spend on luxury items but in places such as Asia, it is men – even on cosmetics and bags. Buying trends such as this tend to be slow, almost generational, but it is something to watch when examining the demand side of the luxury goods sector.

External factors such as government action can also be supportive of the luxury goods sector, something McVeigh points to with regard to China.

He says: “The authorities there are attempting to keep a lid on the property market and perhaps also the stock- market. The effect of this is the massive savings surplus gets quite narrowly channelled and demand for anything from BMWs to Chateau Lafitte to Burberry and Mulberry far outstrips supply.”

McVeigh recently sold his position in Burberry, having more than doubled his money and believing the shares were starting to look expensive.

With all the attention paid to this area of the consumer market, it would seem that such stocks are becoming expensive. However, Gerst argues that while they are not cheap relative to other areas of the market, on a historical basis, they are not expensive just yet. Priced at around 16 times 2012 earnings, Gerft says this is in line with the long running historical average for the sector.

Luxury is one of the areas that Anthony Bolton is playing in his Fidelity China special situations portfolio. Around a third of his portfolio is invested in consumption stocks, including luxury cars. But for many managers, the way to access luxury stocks is via UK and European- listed companies, which are benefiting from the rising emerging market demand.

Gerst says most European-based companies are not facing the wage price increases seen in the emerging areas and they are also benefiting from rising Asian currencies.

Last year was a good year for the luxury industry, with sales and profits growing at a double-digit pace, according to the managers of the JB luxury brands fund, and they also feel the outlook for 2011 is promising. “We expect luxury sales to advance by at least 8 to 10 per cent, driven by emerging markets as well as renewed strength in developed market consumption.”

Demand from the Western world has surprised on the upside lately, particularly in the US, where the recovery has spurred growth in consumer spending.

Gerst says the long-term story for luxury stocks still looks rosy but there is the potential for some short-term drags. She believes there could be a bit of consolidation in share prices and the geopolitical activity in some of the emerging regions could have a knock-on effect to sentiment. “Anything that stops people from travelling can have an impact as it is an important part of the luxury story,” she says.


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