Scilla Huang Sun: «Luxury Handbags Are Outpacing Equities and Bonds»

Scilla Huang Sun, GAM

Scilla Huang Sun, GAM

With designer handbags appreciating ahead of cash, bonds and even equities, GAM Portfolio Manager Scilla Huang Sun comments for on the attractive investment case behind luxury goods.

When markets are going nowhere fast, investors turn to other outlets to invest their capital in the hope of wealth appreciation. Tangible assets, such as real estate, wine, art and luxury goods, often get overlooked during bullish periods, but as traditional security markets move sideways, their physical appeal improves.

True luxury goods can hold their own even in tough economic times, as great products always attract willing buyers. The heritage brand Hermes provides a fantastic example. Founded in 1837 in France, its handbags retail from a few thousand pounds into the tens of thousands as the leathers become more lavish and the trimmings more opulent. Big sums for small purses. The waiting lists for these bags stretches to years, but a dedicated cult following of fashionistas, royals and celebrities ensures a loyal client base around the globe.

Frivolous Purchases

Once considered frivolous purchases, luxury handbags are now holding their own as savvy investments, outpacing both equities and bonds. Rare bags are selling at auction with huge uplifts on their original purchase prices. Going back to Hermes, one of its iconic Birkin bags was sold by Christie’s for $89,106 at the June 2015 Hong Kong auction, while another of the house’s iconic designs, the Kelly, fetched $42,123 – both figures hugely above the original prices.

Both models feature among the top constituents of the Rare Handbag Index, which has produced an average annual increase of 7,8 percent per annum between 2004 and February 2016 in dollar terms, although the Chanel 2.55 Medium Classic Flap Bag led the pack with an annualised increase of 10,6 percent over the same period.

Capturing the Trend

Meanwhile, equities, as measured by the MSCI World Index, managed 6 percent, bonds gained 3,7%, according to the Barclays Global Aggregate Bond Index, and cash has languished in the zero interest rate environment.

Owning the bags as physical assets is one way of capturing the trend, although the market is awash with fakes and somewhat of a minefield for the novice investor. Similarly, physical assets need to be treated as just that – investment bags cannot be used as they only appreciate when in mint condition. Another option is investing in the stock of the leading names.

We see value in the highly aspirational names, such as Louis Vuitton, alongside Hermes, while Gucci seems to be having a real revival. Looking beyond bags at the broader luxury goods market, high-end sportswear worn as street wear has become the preferred off-duty attire for a broad spectrum of consumers – from teens to city professionals.

Fresh Wave of Interest

The trainer has never been so coveted, to the delight of Adidas, which is enjoying a fresh wave of interest in the U.S., while Nike remains a global favourite. In the emerging markets, the yearn to replicate the Western lifestyle as seen on TV and social media is boosting demand for cosmetics from global names like L’Oréal. Make-up and skin care are priced for the masses, so provide an affordable take-home luxury, with interest from men rising.

As much as innovative design and cutting-edge marketing are required to ensure consumer desirability, a healthy focus on cost discipline is essential to keep investors backing a brand’s stock. After years of retail expansion, brands are switching their focus to e-commerce. Many companies are looking to close or relocate non-profitable stores in favour of investing in their digital infrastructure to drive online sales. Lower levels of bricks-and-mortar spend means more free cash flow can be returned to shareholders, as debt levels remain low for most luxury companies.

Negative Sentiment

Not all players have been recent winners though – consumers remain very selective in how they spend, reflecting economic constraints. The excessive negative sentiment toward the watch and jewellery sector is bringing stocks like Swatch, Richemont and Tiffany back down to attractive price points, especially given the high barriers to entry within the sector and its secular growth potential. Global macro volatility is supporting more defensive names like Lindt and premium spirits producer Remy Cointreau, whose business in China has notably improved.

Strong brands remain desirable and the sector has made some smart changes to optimise business models and ensure constant evolution and long-term success. Classic luxury goods stocks have room for valuation appreciation, while the ‘selfie generation’ is ramping up demand for innovation, accessible and affordable offerings. They want to have fun on social and media and look good while they’re at it.

Lot of Bad News Priced In

Following a couple of tough years, the sector has priced in a lot of bad news. Any improvement in global macroeconomics and subsequent sales uplifts should therefore have a disproportionately positive impact on corporate profits as leaner business models and savvy retailing approaches prove their worth.

Scilla Huang Sun is Head of Equities and Portfolio Manager of the JB Luxury Brands Fund. Prior to joining GAM Group in January 2008, she worked at Clariden Leu for eight years as an analyst and manager of a luxury goods portfolio. Prior to that she spent six years at Bank Julius Baer as an analyst responsible for Asian equity strategy. Scilla Huang Sun started her career in 1993, working for J.P. Morgan in Zurich and New York. She graduated summa cum laude and holds a Ph.D. in Economics from the University of Zurich.

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