SINGAPORE – Shares of luxury brands are proving a draw for investors given their stability and growth potential despite general market volatility and rising interest rates. This is reflected in the growing value of such stocks and exchange-traded funds (ETFs).

They make a compelling investment case, noted Ms Christina Chua, a wealth management product lead at KGI Securities Singapore (KGISS), who pointed to the “post-pandemic economic recovery, expanding global luxury market, and remarkable performance of luxury brands”.

“Luxury brands have proven their ability to withstand difficult market conditions and maintain solid financial performance, which is a huge advantage. Additionally, the popularity of trading platforms and social media has generated more discussions and interest around luxury stocks,” she added.

Mr Daryl Goh, head of equity advisory for Asia-Pacific at Citi Private Bank, said clients have shown “a greater interest in the shares of the large French luxury houses” over the last few years.

He added that investing in luxury stocks is also “a way for clients to gain exposure to the rise of China’s middle class”, with the return on equity for the large French luxury houses increasing steadily over the past decade.

Within the first three months of 2023, assets under management at the Amundi S&P Global Luxury ETF increased over 50 per cent from about US$400 million (S$532 million) to about US$602 million, partially driven by the performance of underlying stocks and strong inflows.

The S&P Global Luxury Index, which tracks 80 of the largest publicly traded companies producing or distributing luxury goods or services, rose 13.35 per cent in the first two months of 2023.

Ms Swetha Ramachandran, the investment director of luxury equities at GAM Investments, said the sector is characterised by its high and stable gross margins, which are “a function of its pricing power and key to its ability to reinvest behind growth”.

“Their lower-than-average capital intensity is also attractive in the context of the returns generated by these companies,” she added.

The glowing report cards of luxury brands are also encouraging to investors. LVMH, which counts fashion brands Christian Dior, Celine and Moet & Chandon in its stable, recorded a revenue of €79 billion (S$114 billion) in 2022 with a profit of €21 billion, both up 23 per cent from 2021.

Hermes, another luxury powerhouse and famous for its exclusive Birkin bags, recorded a net profit of €3.4 billion in the financial year 2022, a 38 per cent increase from the previous year.

There are other factors that affect profitability and revenue, such as brand image and corporate actions.

Take the 4 per cent drop in revenue for French firm Kering’s “other houses” segment in the last quarter of 2022.

Brands under Kering include Gucci, Yves Saint Laurent and Bottega Veneta, which are individually listed. The “other houses” group include Balenciaga and Alexander McQueen.

This drop in revenue was in part attributed to two Balenciaga advertising campaigns in late 2022 that were met with calls for a boycott after being accused of depicting paedophilia and child exploitation.

Earlier, investors who desired a slice of luxury jewellery brand Tiffany & Co were disappointed when parent LVMH announced that it acquired the firm in late 2020 and delisted the company in January 2021.

KGISS cautions investors to pay attention to broader market trends and the competitive landscape of the luxury industry: “Changes in consumer behaviour, economic conditions and geopolitical risks can all affect luxury stocks.

“It is important to analyse the competitive landscape of the luxury industry and understand the company’s position in it. Investors should look at the company’s market share, pricing power and brand strength compared with its competitors.”

Very broadly, there are two ways to go about investing in luxury stocks. One can buy shares in individual firms such as LVMH, Richemont or Ferrari, or get ETFs that invest across a broader bundle of assets. Depending on the fund, assets can include luxury apparel and cars, as well as premium hotels and resorts.

Popular funds include the Emles Luxury Goods ETF and Amundi S&P Global Luxury UCITS ETF.

Older people with accumulated wealth and looking for stable investments that can provide consistent returns are more likely to invest in luxury brand stocks, according to KGISS head of research Guangzhi Chen.

Millennials might be keen to invest as well, as they may seek luxury stocks that align with their values, such as shares of environmentally conscious companies producing sustainable fashion, he said.

Asia expected to fuel growth

Luxury brands tend to fare better than many other categories during recessions because of their exposure to high-income consumers, noted Ms Barsali Bhattacharyya, an industry briefing manager at the Economist Intelligence Unit, the research and analysis arm of The Economist Group.

And these brands are looking to the Asian market to fuel growth.

She said Asia is estimated to account for 18 per cent of high-net-worth households globally in 2023, which is defined as having wealth of at least US$1 million. China is expected to account for 33 per cent of the Asian market, with Singapore at nearly 3 per cent.

Ms Charu Chanana, a market strategist at Saxo Singapore, said Singapore remains well positioned.

She noted that it has “one of the strongest offerings of luxury goods in South-east Asia”, with local demand for luxury likely to see a further surge given the large number of wealthy consumers here.

The demand for luxury goods in Singapore is also fuelled by “many more moving in from China and Hong Kong as offices relocate”, she said, adding: “We are also optimistic on the rebound in China’s outbound travel, with Asia potentially being one of the first beneficiaries as the number of flights to the West still remains limited.”

“This will potentially bring an added demand for luxury goods in Singapore, particularly for premium apparels, jewellery, watches, wines and cigars.”