Let’s first admit that most of us are fascinated by global luxury. It is clear that luxury goods brands and products support people’s identities, and are entrenched at the highest level of the Maslow pyramid. This is why Luxury brands are consistently ranked at the very top in terms of desirability. We do not see any reason for this ‘hype’ to fade in the near term, and quite the opposite, it will likely flourish.
Global luxury stocks have started 2023 with undisputed strength, substantially outperforming the global indexes. This is a high-performing sector that manages to create distinctive value fuelled by a constantly growing customer base: (i) there were 62.5mn millionaires worldwide in 2021 (+6.4mn YoY) and this figure could rise to c.87mn by 2026 and (ii) an additional 202mn people with USD100k-1mn wealth of between 2021-26. These are key targets to maintain the fast-increasing demand for luxury goods, projected to hit EUR600bn in annual revenues as soon as 2030, twice as much as in 2021. Furthermore, luxury companies have successfully managed to increase their product price at c.2x the broader CPI rate. Luxury goods are indeed a strong inflation play given their unique pricing power.
But the no-brainer short-term catalyst has been the lifting of COVID restrictions in China. Western countries have enjoyed that YOLO (‘you only live once’) effect in which consumption has massively increased, supported by the extra liquidity accumulated during lockdowns. We expect China to experience a similar or higher YOLO effect, and the first surveys after reopening are already pointing in this direction.
Despite this recent excellent performance, luxury goods are trading roughly in line with historical levels, at c.30x P/E and 17x EV/EBITDA 12-month forward. These are clearly demanding ratios, but given the solid bottom-line growth expectations for 2023-25, these figures are forecast to drop to c.22x P/E and c.12x EV/EBITDA for 2025, which are more manageable levels. Therefore, investing in luxury goods even after the recent run will likely pay off in the long term, although we would recommend breaking into the sector as soon as we see some corrections, with a clear immediate preference for luxury hospitality on a risk-reward basis.