Take A Luxury Trip To China

Published in Investing on 6 March 2012

A Western play on Eastern growth.

In these cash-strapped times, who can afford luxury? Actually, plenty of people can. Maybe not in the West, where shabby chic is all the rage, but things are different in the East.

Emerging markets are embracing luxury. A generation of emerging markets arrivistes has got money to spend and, like the newly rich everywhere, they want to wear their wealth on their sleeve. Or their wrist. Or ears. Or feet.

That's great news for the big names in luxury, such as Louis Vuitton, Hermes, Gucci, Chanel, Hennessy, Rolex, Moet & Chandon, Cartier and Tiffany.

The big luxury brands now generate up to 40% of their sales from emerging markets, and that figure can only grow. Should you invest in the luxury gap?

Chinese champers

China has an awful lot of dollar millionaires. More than 1.1 million, in fact, after adding an astonishing 262,000 in 2010 alone. Only the US and Japan have more, with 5.22 and 1.53 million respectively, according to the Boston Consulting Group (which suspects its Chinese millionaire figure is an underestimate).

China also boasts 271 dollar billionaires, up from 130 in 2009, according to the Hurun rich list. Only the US can top that number, with just over 400.

These Chinese millionaires don't want to drink Chinese champagne. Or carry Chinese handbags. Or wear Chinese wristwatches. Or pose in Chinese haute couture. They want the real thing.

Bought in China

The emerging markets story is not just about cheap exports to the West. Increasingly, it is about expensive imports to the East.

The West makes stuff as well, and much of it comes with a hefty price tag. It's a price that wealthy Chinese, Indian, Russian and Brazilian consumers don't mind paying.

In 1999, BRIC consumers totalled 15% of the luxury market. Now they make up 40%. By 2020, the figure should hit 60%, according to fund manager Pictet, whose Premium Brands invests in leading luxury specialists such as LVMH, Tiffany & Co, Burberry, Ralph Lauren, Christian Dior and Nike.

Luxury labels offer you a great chance to combine BRIC levels of growth and Western levels of corporate governance.

Band of brands

The big brands have enjoyed a glitzy start to 2012. French group LVMH, the world's largest luxury goods company, has just posted a forecast-beating full-year operating profit, including a 22% increase in profits from a recurring operations, and a 16% rise in sales. It also hiked its dividend and hailed the outlook for 2012 as "excellent".

LVMH's fashion and leather goods unit saw profit rise by a fifth, helped by "double-digit revenue growth and exceptional profitability" at Louis Vuitton. You can largely thank the Asian consumer for that.

PPR reported a 17% rise in profits last year, although its biggest brand, Gucci (which makes 37% of its sales in the Asia-Pacific region), disappointed slightly.

Last November, British brand Burberry, which is expanding strongly in China, reported a 23% rise in half-year profits. Almost 20% of its revenue now comes from emerging markets, up from 6% just three years ago.

Burberry's share price rose 12% in January alone. Mulberry rose 20%, after a strong trading update.

The Christian Dior Group has just posted a 21% rise in revenues, growing strongly in Asia. It also sparkled in the US and Europe: the West isn't completely dressed in rags.

Big in China

Greater China, including Hong Kong, Macao and Singapore, is now the single largest global consumer of luxury brands, making up 26% of the market, according to Citi investment research. The rest of Asia, including India, consumes 9%. The remaining emerging markets, including Brazil, Mexico and Russia, make up 12%.

This means emerging consumers now make up 47% of all luxury brand purchases.

The US buys 20% and Europe 19%. Japan, which once gobbled up 40% of the luxury market, now buys just 14%. An ageing population just isn't so brand- and fashion-conscious.

This isn't just about money. It's also about culture. Many in the Western middle class believe that flaunting your wealth is a vice of the vulgar.

The nouveau riche -- and how else to describe the emerging wealthy? -- have never shared that attitude. There are no slackers in China.

The luxury gap

Luxury goods companies also enjoy higher profit margins and lower costs in emerging markets. Most only have one or two flagship stores, so when brand-hungry consumers finally make it through their doors, they are ready to spend.

Emerging market consumers also enjoy a luxury splurge on their travels, because they know prices are often much cheaper. Incredibly, half the items luxury companies sell in Europe are bought by Chinese tourists.

Fool for fashion

Naturally, there is a downside. If the Chinese property market bubble bursts, those newbie millionaires could quickly lose their lust for Western bling.

So whether you want a little luxury in your portfolio depends on how you view prospects for emerging markets. Because what you are buying is a Western play on Eastern growth.

I would argue that this is one luxury you probably can afford.

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