LONDON — While global stock markets might be behaving skittishly in the face of a rocky economic outlook, the luxury goods sector has a smoother course ahead, according to a research note issued by Citi today.
The note, called “There’s Still Time to Trade Up Into Luxury,” cited a number of factors to support the bank’s belief that luxury goods stocks remain a wise investment. They include the sector’s sound long-term fundamentals, the bank said, such as the high barrier to entry into the sector — in terms of brand heritage and manufacturing and distribution — high exposure to emerging economies in Asia and the tourist market; a high degree of vertical integration in manufacturing and distribution; strong balance sheets and limited industry regulation.
The bank also noted the recent strong growth in the sector’s sales. Citi said that luxury goods companies’ sales grew by 20.1 percent in 2011 — their fastest growth rate in the past 15 years — and it estimates sales growth of 13 percent for the sector in 2012 and 9.5 percent in 2013.
“Significantly, [the 2011 growth] was achieved in the context of deteriorating economic conditions in Europe/Asia and successive shocks (Arab Spring, Japan earthquake, oil price [and] market sell off),” Citi’s analysts wrote. “The ‘new normal’ and dire economic growth prospects in the West did not affect high-end discretionary consumption in debt-laden developed economies, as many commentators had predicted.”
And with a growth rate of 74 percent since 2007, luxury goods stocks have outperformed the wider European market by 117 percent since 2007, Citi said.
Citi also noted that the strong growth prospects of emerging markets — whose GDP Citi estimates will grow by 5.3 percent in 2012, versus a GDP growth estimate of 0.8 percent for industrial countries — have a “positive implication for the luxury goods sector.” The bank estimates that emerging markets will contribute 75 percent to luxury goods companies’ sales growth in 2012 and 2013.
In the note, Citi also said it has a positive view on China’s property market and the growth in global tourism, which it believes will be a boon to luxury goods. The bank also forecasts a “renaissance” for the luxury goods market in Japan in the short to medium term, noting that the country makes up 10 percent of the luxury goods industry’s sales by region.
Citi also pointed to improved balanced sheets resulting in more consolidation in the sector, led by PPR and LVMH Moët Hennessy — Louis Vuitton’s acquisitions in recent years. The bank forecasts further consolidation in the industry, which it said will improve mid-cap luxury stocks’ valuation.
Citi named its “most favored” stocks as Richemont, PPR and Coach in the large-cap category, and Hugo Boss, Tod’s and Harry Winston in the mid-cap category. The bank said it remains “neutral” on Burberry and Sotheby’s.