ETFs with luxury exposure could pamper investors’ returns

Aug 7th, 2012 | By | Category: Equities

With fears of slowing economic growth in the United States, Europe, and emerging markets intensifying, some investors have questioned whether the luxury segment, which has been surprisingly resilient in recent years, can continue its strong run.

ETFs with luxury exposure could pamper investors' returns

ETFs with luxury exposure could pamper investors’ returns.

Despite the economic woes, this segment continues to have several tailwinds at its back and should deliver strong revenue growth in the coming years, according to Ken Schapiro of Condor Capital Management, a US-based investment manager.

In recent weeks, several companies in this space have reduced their earnings guidance and some analysts have reduced their estimates.  However, Schapiro feels that this is more a function of estimates getting ahead of themselves in recent months rather than a significant deterioration in the underlying fundamentals.

To illustrate, while handbag and accessories maker Coach recently reported revenue that the market perceived as “disappointing,” as North American same-store sales rose an underwhelming 1.7% over last year, its overall sales still grew 12% year-over-year and an impressive 60% in China.

Although it is possible that near-term results for luxury goods companies could face pressure due to various uncertainties around the globe, sell-offs could present a buying opportunity for long-term investors.  This sentiment was recently echoed by Goldman Sachs, which upgraded jeweller Tiffany to a “Buy” rating. Goldman analysts noted that despite the possibility for near-term weakness, “Tiffany’s long-term brand franchise remains rock solid.” Similarly, Nomura recently came out positive on the European luxury goods segment, noting that the segment now trades at a rolling 12-month forward P/E of 14x – firmly below its historical average of 15.6x


Amundi ETF MSCI Europe Consumer Discretionary

– Tracks the MSCI Europe Consumer Discretionary
Index providing cheap and efficient exposure to
European consumer discretionary stocks

– The index has significant premium brand exposure
(c. 50%) and is home to a large proportion of the world’s
biggest and best-known luxury brands

– Constituents include luxury groups LVMH, Compagnie
Financiere Richemont and PPR, as well as Burberry,
Christian Dior and Hugo Boss, to name but a few

– Fully collateralised swap-based replication, with full
transparency to index constituents and underlying
collateral holdings

– UCITS compliant, London listed, UK Reporting Status,
eligible for ISAs and SIPPs, TER 0.25%, cross listed
on Euronext, Deutsche Börse and Borsa Italiana

In the US, despite slowing employment growth and a decline in consumer confidence, Schapiro still believes that the high-end segment is poised to outperform in the second half of the year.  Although higher-income consumers are less leveraged to gasoline prices than others, a price decline at the pump nonetheless provides a solid psychological boost.

In Europe, predictions of a recession have dampened some investors’ enthusiasm for the segment since the region is the largest luxury goods market in the world.  Even with this turmoil, consulting firm Bain & Company projects 2-4% growth for luxury goods in the region for 2012.  Although this is slower growth than in other parts of the world, it is encouraging considering that EU GDP is projected to contact by 0.30% in 2012 according to the World Bank.

Some of this resiliency may be attributed to shopping by tourists visiting from emerging markets.  When considering China’s 30% tax on luxury goods and a sharply weaker euro, Louis Vuitton Moet Hennessy (LVMH) Chief Financial Officer Jean-Jacques Guiony estimates that Chinese consumers can save 45-47% by shopping in London or Paris instead of their home market.

Looking towards developing markets, powerful cultural, economic, and demographic trends should continue to support robust growth for luxury goods in these countries.  Although aggregate GDP growth has slowed in India, Brazil, and China, these nations are beginning to transition from infrastructure-fuelled growth to consumer-led economies.

As a result, even though the pace of economic growth has slowed, consumer expenditures will have a greater impact going forward.  A report by investment bank CLSA Asia-Pacific estimates that emerging markets will account for 73% of global luxury goods sales by 2020, with China surging to a 44% share from just 15% today.  One driver of this increase is the coming surge in middle class consumers within the BRIC nations. Collectively, these countries could have one billion middle class consumers by 2015, a gain of 376 million over 2010.

In China, per capita income rose 8.4% in 2011 for urban residents and 11.4% for those in rural areas on an inflation-adjusted basis.  Looking forward, some analysts predict that Chinese per capita income could hit $8,500 by 2020 and as much as $20,000 in 2030.  In China’s hierarchical culture, where success, wealth, and social standing are highly regarded, much of this newfound disposable income may be used to purchase high-end goods that highlight success.  A poll by Harris Interactive shows that 72% of Chinese respondents and 74% of Indian consumers indicate that brand names are important them, in contrast with just 26% of shoppers in the US

Outside of goods, a study by Boston Consulting Group shows that, of the $1.4 trillion spent on what consumers define as luxury, sales of high-end “experiences” are growing 50% faster than those of goods.  The report noted that an increasing share of shoppers “love experiences that make them feel pampered.”  While this sentiment certainly bodes well for areas such as luxury hotels and high-end travel, it also has ramifications for the goods market.

In the US, stores such as Nordstrom, sporting legendary customer service, could be viewed as providing both a luxury good and a differentiated experience.  The same holds true in China, where wealthy shoppers flock to malls populated by stores that not only offer US and European brands, but a pampered Western-style shopping experience as well.

Considering everything, although there are certainly a number of headwinds facing the luxury market, Schapiro feels that sales within developed nations may come in better-than-expected for the second half of the year and the longer-term secular tailwind provided by emerging markets remains intact.  While he is cognizant of the potential for volatility in these names in the near-term as the market reacts to various headlines and data points, Schapiro feels that their long-run appeal is unaffected and remains bright.

For investors wishing to gain exposure to this theme, European consumer discretionary ETFs provide cheap and efficient access. For example, the Amundi ETF MSCI Europe Consumer Discretionary (CD6) has almost 50% exposure to luxury and high-end brand companies. Among this fund’s holdings are LVMH (Louis Vuitton, Givenchy, Tag Heur etc), Compagnie Financiere Richemont (Cartier, Montblanc, Alfred Dunhill, etc), PPR (Gucci, Yves Saint Laurent, Stella McCartney, Brioni, etc), as well as Burberry, Christian Dior, Luxottica (Ray-Ban, Oakley), Hugo Boss, Daimler (Mercedes Benz), BMW and Porsche, to name but a few. This fund is also cross listed on Euronext, Deutsche Börse and Borsa Italiana.

Alternatives to the Amundi ETF include the SPDR MSCI Europe Consumer Discretionary ETF (listed on Deutsche Börse, Euronext, Borsa Italiana, and SIX), which tracks the same index, and the Deutsche Börse-listed Consumer Discretionary European Source ETF (SCODS), which tracks the STOXX Europe 600 Optimised Consumer Discretionary TRN Index.

For global consumer discretionary exposure, investors could consider the DB X-trackers MSCI World Consumer Discretionary TRN Index ETF (XWSC), which is listed on the London Stock Exchange, Deutsche Börse and Borsa Italiana.

For US-based investors, the iShares S&P Global Consumer Discretionary Sector Index ETF (RXI) provides exposure to global consumer dictionary stocks, while the First Trust Consumer Discretionary AlphaDEX ETF (FXD), PowerShares Dynamic Consumer Discretionary ETF (PEZ) and Vanguard Consumer Discretionary ETF (VCR) offer domestic consumer discretionary exposure.

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