By the research team at Amundi Asset Management.
Getting in on global luxury
Investors need not take an active approach to global luxury; instead, they can benefit from the flexibility and cost-efficiency of ETF investing and gain exposure to this investment theme through the S&P Global Luxury Index.
This approach provides exposure to a diversified basket of the largest publicly traded companies engaged in the production or distribution of luxury goods or the provision of luxury services.
Luxury has outperformed the broader market
As economies have become more consumer-driven, discretionary spending and, specifically, spending on luxury goods as a sub-set of that, has grown to represent a greater proportion of global GDP. Over the last decade, the S&P Global Luxury Index has outperformed the MSCI World Index by approximately 3% on an annualized basis, demonstrating strong resilience over various cycles.
At the centre of this structural growth in luxury spending has been the evolution of the wealthy classes in China and other emerging Asian economies. This growing influence has been no less evident than over the last year with a number of luxury brands recording bumper sales in mainland China despite the COVID-19 pandemic.
A report by Bain & Company estimated that the luxury goods market in mainland China will have achieved 48% growth in 2020, doubling China’s share of the global luxury market. Chinese spending on luxury goods as a proportion of global luxury expenditure is forecast to increase by over 20% between 2020-2025, putting it on course to become the biggest market by 2025.
Source: Amundi.
Coronavirus a catalyst for online sales
The COVD-19 pandemic has acted as a catalyst for significant change in the luxury goods industry. Online sales increased sharply in 2020, doubling its share of global luxury sales to 23% from 12% in 2019, becoming the fastest-growing distribution channel. Online is expected to become the leading channel for luxury purchases by 2025, representing a complete transformation of the distribution landscape. The rise of e-commerce presents a strategic opportunity for large luxury brands to reach new regions and markets as well as protecting profit margins as bricks and mortar are replaced by digital platforms supporting direct cross-border sales.
The rise of the Millennial and Gen Z shopper
The effect of 2020 has also strongly accelerated the growth of Millennials and Gen Z with these younger generations expected to drive 180% of the growth in the luxury goods market from 2019 to 2025, representing over two-thirds of global purchases. The shift towards online distribution channels will provide greater access to these tech-savvy younger shoppers who will define future market trends – whether around issues of sustainability and the environment or diversity and inclusion. This early onset of wealth shift to younger generations with even stronger demand for luxury goods than previous generations is just another positive driver of structural growth across the industry.
Constructing an index for a winner-takes-all market
Market cyclicality has favoured the largest luxury brands, particularly those that have created diversified portfolios of underlying luxury brands appealing to both high-end and mass-market consumers. For example, the top 20% of fashion brands accounted for 177% of the industry’s profitability in 2018, reiterating the winner-takes-all nature of the luxury goods market. As well as strong brand power, scale provides a basis to extend horizontally into new luxury categories which will continue to drive M&A activity across the industry as evidenced by LVMH’s recent acquisition of Tiffany & Co. The S&P Global Luxury Index attempts to capture the major companies best positioned to capitalize on the structural long-term growth across the global luxury industry.
The index is composed of 80 of the largest publicly traded companies engaged in the production or distribution of luxury goods or the provision of luxury services that meet specific investability requirements. Index constituents are weighted by float-adjusted market capitalization multiplied by a luxury exposure score, subject to single stock weight caps. This results in a diversified and investable basket of companies that provides strong exposure to the global luxury theme.
Affordable luxury
Fortunately, investing in luxury doesn’t have to come at a premium. Investors looking for a flexible, cost-effective way to access this long-term investment opportunity may wish to consider ETFs. The Amundi S&P Global Luxury UCITS ETF offers low-cost exposure to the basket of stocks that comprise the S&P Global luxury index in a single transaction.
(The views expressed here are those of the authors and do not necessarily reflect those of ETF Strategy.)