How art gets generated.
Luxury goods companies were the height of investment fashion in the spring, as their profits soared on demand from brand-hungry Chinese consumers.
But investment trends, like fashion fads themselves, can change with the seasons, and some renowned British designer brands have taken the equivalent of a catwalk tumble.
Mulberry, whose share price had leapt fivefold from £5 to £25 in the 15 months to April this year, has suffered a real handbagging since, tumbling by 60pc to £10, although it has since recovered to more than £12. FTSE member Burberry, famous for its check design, also slid out of fashion over the summer before its shares fell by 27pc in October when it warned of a slowdown in sales growth.
Is this a great opportunity to snap up luxury stocks at bargain prices, or could investors be walking into the next fashion disaster?
Luxury brands typically struggle during a recession, as cash-strapped consumers restrict their spending to essentials such as food and other household bills, but this time looked as if it might be different.
While recession-hit Western consumers embraced austerity chic, the emerging middle classes in China, India, Russia and beyond were keen to display their new-found wealth by snapping up designer handbags, perfume, haute couture and jewellery.
This gave a massive boost to the sales and share prices of global names such as Burberry and Mulberry, US-listed Tiffany & Co and Ralph Lauren, and French conglomerates Moët Hennessy Louis Vuitton (LVMH) and PPR, which owns Gucci and Yves St Laurent.
Emerging market consumers are now responsible for around 40pc of luxury goods sales, according to specialist fund manager Pictet, whose Premium Brands fund targets companies in this sector. It predicted that demand would rise by as much as 20pc this year.
Many investors saw London-listed stocks as a safe and stylish way to play the emerging market growth story, but fears of a Chinese economic hard landing dented confidence, said Tim Cockerill, an investment analyst at stockbrokers Rowan Dartington. “Everybody started to act as if emerging market demand for luxury goods would just grow and grow, and nothing would ever go wrong. When China started slowing, the big brands were punished by a disappointed market.”
This is partly a story of inflated market expectations. China is no longer posting double-digit annual economic growth, but it is still likely to grow at an average of 8.3pc a year over the next five years, according to the latest OECD forecast. Burberry and Mulberry are still banking fat profits, just slightly lower than previously expected.
“The long-term story is still solid. The growing middle class in China, India and other emerging markets will continue to buy luxury goods, offsetting subdued demand from the US and Europe,” Mr Cockerill said.
The Chinese haven’t lost their taste for luxury, said Peter Kirkman, portfolio manager of the JPM Global Consumer Trends fund. “Sales in China may have slowed for some brands, but that’s because the Chinese are increasingly buying their luxury goods in Europe. Since mid-2011, the euro has weakened by almost 14pc against the renminbi [the Chinese currency], and that, coupled with three layers of luxury taxation in China, makes shopping in Europe a bargain.”
The growth in global brand tourism means that Chinese tourists alone account for a third of luxury spending in Europe, according to figures from Bain & Company.
Fears of a China slowdown have also been overblown, Mr Kirkman said. “GDP growth may have slowed, as planned, but consumption has been resilient. Employment and income growth have been very healthy, while retail sales have grown in 2012.”
The Chinese and emerging middle class will continue to aspire to Western luxury, he said. “We continue to tap into this by holding US luxury designer Coach, French multinational PPR and Swiss watchmaker Swatch.”
There are signs that the big fashion houses are already fighting back. Burberry shares are 16pc higher than their October lows, after half-year results showed pre-tax profits rising by 7pc to £173m.
It has also axed some of its cheaper lines and raised prices: you need a minimum £1,000 to buy one of its trademark trench coats. LVMH, Tiffany and PPR are also regaining their cool, although Mulberry continues to struggle.
Luxury stocks were a classic victim of high investor expectations, said Alec Letchfield, chief investment officer of wealth management at HSBC Global Asset Management. “Their valuations became too high, as expectations outstripped reality, and they’re still high compared with the market generally.”
Now may be a little too soon to start buying, he said. “There is an old investment saying that you should buy on the third profit warning, not the first. The sector is appealing, but it could become more attractive over the coming months.”
Ben Yearsley, the head of investment research at Charles Stanley Direct, is also cautious. “We reached the point where everybody thought luxury goods stocks could only go in one direction, but nothing lasts forever. Fashion is a precarious business, stocks can quickly fall out of style.
“The safest way to target this sector is to spread your risk, through specialist funds such as JPM Global Consumer Trends and Pictet Premium Brands.”
The JPM fund is up by a modest 14pc over the past three years, according to figures from Trustnet, while the Luxembourg-based Pictet fund has returned 60pc in that time. Its top holdings include luxury names such as LVMH, Christian Dior, Richemont, whose luxury brands include Cartier and Chloé, and PVH, which boasts Calvin Klein and Tommy Hilfiger.
Mr Cockerill said there might be a better way to invest in emerging market consumers. “Luxury goods companies should do well in the long term, but we think global drinks giant Diageo is a better way to play China. It has great global earnings prospects through Johnnie Walker whisky, a premium brand but not a luxury one.”
Or you could spread your risk by investing in a China fund with a solid track record, such as First State Greater China Growth, or a global fund such as First State Global Emerging Market Leaders, Mr Cockerill said.
If you believe in the power of brands, now may be a good time to add a little cut-price luxury to your portfolio. Just make sure you don’t become the next fashion victim. THIS year has seen the best of times and the worst of times for two renowned British fashion houses, said Richard Hunter, head of UK equities at Hargreaves Lansdown.
Burberry is a member of the FTSE 100 with a market value of £5.4bn, while Aim-listed Mulberry is a relative minnow at £626m. Both stocks were the height of cool earlier this year, then fell out of favour as their rampant sales growth slowed.
Burberry had a difficult summer, but its half-year results, published in early November, reminded investors that it is a company with prospects, Mr Hunter said. “Group revenue, retail revenue and pre-tax profit increased by 6pc, 9pc and 7pc respectively, while Burberry’s management underlined its confidence with a 14pc rise in the dividend payment.”
Burberry may still suffer if Chinese consumers trim their spending. “But it is well-diversified geographically and is still, of course, profitable,” he added. “Some investors used the September share price fall as an entry point. The market consensus is now a strong hold.”
Mulberry’s recent dramatic success meant its share price had become heady. “When sales and revenue growth slowed it took a major hit, and has fallen by 52pc over the past six months.”
All is not lost, Mr Hunter said. “Mulberry’s trading update also showed a 6pc rise in revenues and 41pc growth in international sales. It is a lot smaller than Burberry, and may tempt investors looking for a high-risk growth stock.”
By Harvey Jones, January 3, 2013. Telegraph UK.
For the full article, please visit: http://www.telegraph.co.uk/finance/personalfinance/investing/shares/9705193/Is-it-time-to-invest-in-a-little-luxury.html