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Top tips for luxury stocks

Isaac Mostovicz writes that the significant growth of luxury stocks in emerging markets is attracting increased attention from investors...

Head of equities at Swiss & Global Asset Management, Scilla Huang Sun talks to The Wall Street Journal about why luxury stocks are now worth a look.

As I have discussed in recent posts, luxury stocks are booming in emerging markets. As an investor, this surge in wealth could be fruitful.

James Hall from the Daily Telegraph recently reported that urbanisation on an unprecedented scale is taking hold in China, the nation set to overtake Japan as the world’s largest luxury market by 2015. It is this “new consumerism” which is driving luxury growth in many emerging markets.

As Huang Sun highlights, while the long-term outlook for luxury stocks remains strong, they are susceptible to geopolitical events. Luxury spending has been hit hard following the recent Japanese earthquake and tsunami. Huang Sun estimates that the Japan and Middle East events will reduce sales growth by 2% in 2011.

For Huang Sun, prosperous luxury brands are those with successful brand management, strong financials and which are broadly diversified across regions and sectors.

Read the full interview here.

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Luxury brands feel the effect of Japan’s disaster

Isaac Mostovicz writes that Japan's recent humanitarian disaster is having share price implications for some of the world's best known luxury brands...

While it can perhaps seem distasteful to discuss stocks and shares in the aftermath of a humanitarian disaster, the impact can be significant, and when the disaster has hit a nation such as Japan which is said to account for 23 per cent of the global market for luxury goods (according to MF Global), it can have severe implications for exposed brands.

In an understandable reaction to Friday’s crisis in Japan, Japanese investors dumped stocks: Japan’s Nikkei .N225 shed 10.6 per cent on Tuesday. The UK’s stock markets fell a fraction of that amount, but luxury names suffered. Shares in some of the world’s biggest luxury goods companies fell amid concerns that high-spending Japanese consumers will, at least in the short-term, stop shopping.

Burberry was down 6 per cent in Monday morning trading; Japan accounts for 7 per cent of Burberry’s sales. In Paris, shares in LVMH, which relies on Japan for 9 per cent of sales, were down more than 3 per cent, while Gucci and Yves Saint Laurent owner PPR, which relies on Japan for 16 per cent of sales, was off nearly 2 per cent.

Having experienced limited growth during the past decade, luxury brands have shifted attention from Japan to emerging Asian markets such as China, but as the above numbers show, Japan is still crucial to many of these companies.

With the world’s attention now focused on a potential nuclear disaster, analysts have suggested that luxury spending may be curbed for some time.

“While not all parts of the country were equally affected physically, recent events will almost certainly dampen the consumer mood,” Nomura Securities analyst Paul Lejuez said in a research note.

The worry for markets now is that the disaster will affect buying and shoppers’ likelihood to spend elsewhere. Luxury sales depend on people’s confidence; if the crisis continues to develop in Japan this could effect spending on a global scale.

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Hedonistic, Eclectic … and Frustrating?

Isaac Mostovicz writes...

Interesting story in the Wall Street Journal today–Wall Street firms including Merrill Lynch and Goldman Sachs are launching indexes that measure the “separate economy” of the rich, tracking some of the most famous brands in the world.

“The common denominator for all the stocks selected in our sample is they benefit from the increasingly hedonistic and eclectic consumption patterns,” says Antoine Colonna, the Paris-based research analyst at Merrill who helped create the company’s ML LifeStyle Index. … Merrill’s index, a group of between 15 stocks and 50 stocks, includes car makers BMW and Porsche; luxury conglomerate LVMH; fashion brands Bulgari, Coach and Burberry; jeweler Tiffany; auctioneer Sotheby’s; and private-banking firm Julius Baer. The index increased 23% in 2005 and 12.5% in 2006 — above the 14% and 7% posted for the Morgan Stanley’s MSCI World Consumer Discretionary Index, a widely used measure for global consumer stocks.

These luxury stocks are outperforming regular consumer stocks; spending on high-end goods has far outpaced the expansion of the overall consumer economy. But the WSJ does warn that this might be a bad sign:

Granted, investing in the upper class could turn out to be a poor strategy. Wall Street is notorious for launching sector funds at the peak of a sector’s growth. (Think health-care funds and tech funds in the 1990s and commodity funds last year.) The launch of the luxury indexes could be seen as the top of this market. In the wake of the latest upscale-buying binge, many luxury stocks have soared and have price tags as rich as their products.

For now though, people continue to spend and the introduction of the indexes is yet another sign that more people are interested in luxury.

But should they be? Today the Dalai Lama, the Tibetan spiritual leader, made a statement urging people to take a step back from the “mindless” pursuit of luxury because of the frustration and tension that such a pursuit can cause:

“In the era of globalisation and modernisation people are forgetting their real goal which is causing frustration and tension in their day-to-day lives… The objective of the people is confined to earning money and power by any means to enjoy luxuries and they are becoming selfish and self-centred in this mad run.”

He instead advocated more dedication to service to humanity.

It probably wouldn’t hurt Wall Street to hear the Dalai Lama’s different perspective. But I think if his advice were to reach them, it would probably fall on deaf ears–well, at least until the next bubble bursts.

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