What to consider when investing in global luxury

There are certain sectors that have a unique appeal to investors, and one of them is global “luxury”. But is it a worthwhile place to invest your hard-earned funds? 

What is luxury? 

Luxury stocks can be defined as stocks of companies that sell high-end, premium goods and services that are non-essential yet desirable. Some examples are watches, cars, diamonds, leather goods, fashion, perfume, and wine.  

There are several key characteristics of luxury stocks: 

• Association with exclusivity, high quality, and prestige: Luxury brands cultivate an aura of exclusivity and prestige around their products. 

• High price points: Luxury goods are priced significantly above non-luxury alternatives, and do not compete on price. 

• Focus on heritage, craftsmanship, and tradition: Luxury brands emphasise their history, provenance, and traditional production methods. 

• Influence on culture and consumers: Luxury brands shape aspirations and consumer desires, and signal high status. 

• Investment in innovation: Luxury brands continually innovate while also preserving brand heritage. 

• Manufacturing in place of origin: Luxury production is often centred in the historical or cultural birthplace of the brand. 

How to gain exposure to luxury 

One of the pillars of success in investing is diversification. This also applies to luxury, and the easiest way to gain exposure to the luxury theme is to buy a luxury ETF which consists of several luxury stocks. One example is the Amundi S&P Global Luxury UCITS ETF, which includes companies such as Hermes, LVMH, Ferrari, and Kering.  

Another approach for investors could be to create your own selection of stocks. 

Performance 

Despite luxury’s connotations with wealth, success and high quality, not all investments in this theme have proven successful. In the five years to November 2023, the luxury theme (the Amundi S&P Global Luxury UCITS ETF) outperformed the broader US S&P 500 index (+69% vs +61% respectively), but fell short of the tech-heavy Nasdaq 100 index (+127%). The performance in individual luxury shares ranged from -30% to +277% over this five-year timeframe, underscoring the importance of selecting the right stock. 

Conclusion 

If you are considering investing in the luxury goods theme, there are some important guidelines to take into account: 

• Ensure you diversify through either a luxury-themed ETF or a broad range of luxury companies. 

• Look for luxury brands that invest in innovation to stay relevant while maintaining their aura of exclusivity. 

• Beware luxury brands that expand too quickly or dilute their exclusivity, as this may reduce their ability to command premium pricing. 

• Consider luxury brand companies that influence culture and command loyal customer bases, as this can indicate pricing power and resilient demand. 

• Factor in that the luxury market tends to be more resilient in economic downturns, as their affluent customer base is less impacted.