Niall Gallagher, Investment Director, GAM Investments has commented on the outlook for the luxury sector.
He said: “It is clear to see that over the long term the luxury sector outperforms. If you bought and held the sector 25 years ago, you could have made an excellent return.
“The luxury sector has had a huge acceleration over the last four to five years, particularly since 2019. During this period, we had the pandemic where consumers were unable to spend, followed by ‘revenge spending’ with the cash accumulated during the lockdowns. To give an idea of how big this acceleration has been, the value of sales in the US and Europe are up between 80%-100% since 2019; a very material luxury boom.
“The market has since been bullish on China since Chinese luxury spend is below 2019 levels, so the hope had been that while spending in Europe and the US might flatten, China would pick up the baton. However, so far, we have seen a more cautious Chinese consumer.
“Given the size of the luxury boom in the US and Europe, it would be fair to assume we might see some flattening of spending. However, medium- and long-term support for the sector remains given its exposure to Asia, the tendency of Generation Z to ‘buy less, buy better’ and the growing number of millionaires and billionaires who will boost the sector.
“Not only has the sector experienced strong growth in sales but profit margins are also at an all-time high; LVMH’s profit margins hit 26% EBIT margins, the highest ever. Given the high revenues and high profit margins, our expectation would be for growth to moderate in the near term as it is a cyclical industry.
“In terms of valuations, the price/earnings of LVMH, a proxy for the luxury sector, relative to the European market traded at a 35%-40% premium between 2001 and 2019. That rose to a 120% premium in 2021. This year it has fallen back to a 63% premium, which is lower than it was but still relatively highly valued versus its own history.
“Our long-term view on the sector is positive but we do need to be cognisant of shorter-term operating fundamentals, as well as valuations.”
