For Consumer Discretionary Investors, Luxury Is Where It’s At

By Aaron Levitt | October 04, 2013 AAA

Stagnant unemployment numbers, falling consumer confidence and overall lower wages have created an aura of thrift in the U.S. While spending is beginning to make a return, the truth is poor consumer sales are still persisting and retail remains in the doldrums.

That is only if you cater to the middle and lower classes.

Global luxury goods sales are exploding as the rising incomes in the emerging markets have resulted in a spending wave. Meanwhile, with the 1% here at home- after getting through the recession unscathed- have finally begun to open their wallets once again. For investors, the key to playing the consumer market is to avoid the middle market and go after these high spending customers.

Double Digit Growth

It seems that wealthy consumers across the globe have no problems opening their wallets. Luxury good sales continue to surge and that makes a great portfolio play for the rest of us.

According to private equity group Bain Capital, luxury goods spending is poised to grow as much as 50% faster than global GDP over the next few years. Bain forecasts that sellers of high-end watches, clothes and cars will see revenues and sales expand by 4 to 5% throughout 2013 and average 6% through 2015. While some areas such as Southeast Asia will see luxury sales growth in the 10 to 20% range. This is on back of the more than 10% surge in global luxury spending last year. Overall, this torrid spending growth on luxury items will break the €250 billion sales threshold by mid-decade.

Much of the spending is coming from newly minted rich and middle class citizens in the emerging world. As these nations have prospered, their citizens have grown accustomed to more western conveniences and tastes. For example, BRIC superstar China continues spend feverishly on luxury goods. Premium automobile purchases in the nation rose 30% in 2012, while luxury watch sales popped more than 43%. All in all, Goldman Sachs (NYSE:GS) predicts that China will become the number one consumer of luxury goods in 2015- up from the third spot. Meanwhile, rising incomes in Latin America, the Middle East and Emerging Europe are all driving luxury goods spending in their respective nations.

That growth in high-end goods spending is also happening here a home. Rising stock prices, along with low interest rates have helped the nation’s richest citizens. That’s trickling down towards more luxury spending. Jewelry retailer Tiffany & Co. (NYSE:TIF) recent earnings showed that it saw sales growth of 2% in its more expensive categories of jewelry versus its “cheaper” items.

Overall, all of this luxury spending has Bain estimating that the global luxury goods market in 2025 will be more than five times larger than it was in 1995.

Buying A Luxury Portfolio

Given the long-term rise in global luxury spending, investors may want to give the sector a go for their portfolios. The Consumer Discretionary Select Sector SPDR (NYSE:XLY) is often cited as the best way to gain exposure to firms providing “wants”. However, a better bet maybe the iShares S&P Global Consumer Discretionary ETF (NYSE:RXI). The fund tracks 171 different discretionary firms including luxury brands like LVMH Moet Hennessy Louis Vuitton SA (OTCBB:LVMUY) and Starwood Hotels & Resorts (NYSE:HOT). Overall, the ETF can used a broad play on the theme for low cost. Expenses only cost 0.48%.

One of the largest varieties of rising luxury spending happens to be watches. All product categories have seen growth over the last few years as customers across the globe have taken a shine to the accessory. This trend will benefit a host of firms such as Swatch (OTCBB:SWGAF). However, the biggest winner could be Movado Group (NYSE:MOV). The company provides watches in the so-called “sweet spot” –priced between $300 and $3000- that are attracting the most global customers. That position seems to be helping as the firm saw a 37.5% jump in earnings for the last reported quarter.

Finally, handbags continue to be a source rising luxury spending. The trio of Coach (NYSE:COH), Michael Kors Holdings (NYSE:KORS) and Vera Bradley (NYSE:VRA) continue to see rising sales and earnings on the back of healthier high-end consumer. That’s been reflected in their shares prices.

The Bottom Line

For the rich and growing middle classes of the world, spending on luxury goods continues to surge. That can provide a nice portfolio play for the rest of us. The previous picks- along with high-end retailer Nordstrom (NYSE:JWN) –make ideal ways to play the continued trend of rising spending patterns of the wealthy.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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