- The luxury sector pulls ahead of other global equities by more than 20% YTD
- Luxury leaders show strong performance driven by revenue growth in Europe and Asia
- Growth in Chinese spending abroad could offset impact of US slowdown
- Most high-end, exclusive brands are favoured, with expected resilience in looming economic slowdown
Sectoral call on luxury playing out as high-end spending remains resilient. On the back of secular trends of rising affluence and consumerism, we had earlier identified the global luxury goods sector as a winner for the 21st century. Today, although dampening consumption, growth headwinds and economic challenges cloud the near-term horizon, this has not dulled the sector’s outlook. In fact, this challenging climate has allowed leading brands to distinguish their performance as evidenced through their brand loyalty, superior pricing power, and resilient demand through economic cycles.
Indeed, the luxury sector has widened its lead in a macroeconomic environment that has otherwise proven challenging for investors. To illustrate, the European luxury index widened its outperformance over global equities by more than 20% year-to-date (YTD), with luxury powerhouse LVMH making headlines by becoming the first European company to break USD500b in market capitalisation. Other luxury bellwethers have also displayed outstanding performance, driven by strong sales especially in Europe and Asia.
Risks to the sector include a slowdown in consumption given the challenging macro environment, especially in the US. There are also uncertainties regarding sentiment in China as the society emerges from months of prolonged, stringent lockdowns. Nonetheless, we remain optimistic regarding the gradual return of Chinese tourists to global luxury retail and China’s continued role as the world’s consumption engine. Furthermore, should a slowdown ensue, the most established brands catering to the most exclusive echelons of consumers are generally insulated and able to best defend their margins, boding well for the owners of top brands. On the flipside, companies concentrated on specific brands which are still subject to execution risk could face challenges.
We reiterate our strategy to focus on high quality companies. The outperformance of the sector has been backed by strong organic sales growth, demonstrating the ability of distinguished brands to entice consumers through economic cycles. Stay with industry leaders given brand polarisation that favours the most established, exclusive brands.
Figure 1: Luxury sector widening its lead since the start of 2023
Source: Bloomberg, DBS
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