Profiting From the Growing Income Disparity

One of the most enduring and dominant investment themes of the 21st century is rising consumption. The argument is well established, the expansion of the middle classes in the emerging economies drive economic growth. The ‘global middle class’ is projected to reach over 1.2 billion people by 2030. Emerging from the burgeoning middle class is an upper stratum of affluent consumers, providing the impetus for higher discretionary spending. European products with strong, well-recognized brands are ideally placed to benefit from this trend.

Soaring incomes, a bulging upper middle class and technological advancements will inevitably lead to growing gap between the haves and the have-nots. However Astute Investors will be able to identify opportunities to profit from diverging incomes. As the rich continue to get richer, they will lavish more of their money on luxury goods. Therefore shrewd investors can tap into this trend by investing in luxury brands, rather than lusting after expensive and unattainable luxury goods.  And in doing so, you would be letting the rich make you richer.

Investing in luxury brands is certainly in vogue, the luxury goods sector has outperformed the ‘Morgan Stanley global equity index’ over the last five years. One pertinent example is the phenomenal success of British fashion brand Mulberry, their pre-profits more than tripled by 358% in the year 2011, March 31. And the share price has increased by nearly twenty fold since their March 2009 lows. Many other luxury European firms also boast similar stellar earnings growth underpinned by strong fundamentals and world-recognized brands. Together with consistent and strong economic growth rates in the emerging countries, the exponentially growth within the luxury goods sector remains firmly in place.

The rise of the Asian economies today remains critically important to luxury companies. For example Chinese consumers today represent 40% of premium brand sales; this is expected to increase to over 60% by 2020. The new financial and industrial elite in Asia are increasingly consuming European luxury brands for their prestige and to underline their social status. Moreover Luxury brands have a further appeal amongst Asian consumers, because they were once the sole preserve of the aristocracy.

Renowned luxury brands luxury brands like Louis Vuitton and Tiffany’s will benefit from that fact that they have little or no competition; there are only few genuinely first class brands.  Experts say it takes a nearly a century to establish a world renowned luxury brands.  Furthermore luxury brands enjoy prestige and exclusivity allowing them to charge exorbitant prices. This gives the sector high margins and enables them to raise prices faster than inflation; companies are able to do this because they are at the upper-end of the market. Also luxury brands deliberately restrict the supply of their products in order to charge premium prices.

Investors can best gain exposure by investing in leading luxury brands.  Examples include LVMH (Louis Vuitton Moet Hennessy), this is a multinational luxury goods conglomerate, they are behind brands such as Tag Heuer, Krug and Louis Vuitton. Another is Mulberry, a quintessentially luxury British brand, a leather retailer know for its poacher bags, they have stores throughout Europe, America, Australia and Asia. Burberry also is another British fashion house, under the CEO Angela Ahrendt, she has modernised the brand and put Burberry at the forefront of social networking and developed a state of the IT system and e-commerce website. They have also been aggressively expanding their global footprint with new store openings planned in South America and Asia-pacific. Investors seeking a more diversified exposure can purchase a stake in an investment fund specialising in the higher-end market, one such example is the ‘Pictet Premium Brands Fund’ from Swiss Asset Management firm Pictet. Over the last three years to June 17, 2011, they have gained 57%.  They target companies with ‘strong brand recognition’ that provide ‘aspirational products and services’ to their customers.

However much like the products they sell, many of these companies trade at expensive valuations, whilst their fundamentals remain healthy, it would be best to place these brands on your radar and wait for their share prices to reach more attractive valuations. Overall Investing in luxury brands and funds specialising in this theme remain a compelling long-term investment for investors looking to make luxury profits.


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