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How Investors Can Profit From Asia's Sparkling Luxury Goods Market

Companies / Investing 2010 Oct 27, 2010 - 09:26 AM GMT

By: Tony_Sagami

Companies

Best Financial Markets Analysis ArticleI should be used to it by now, but I am always amazed at the conspicuous display of wealth whenever I travel to Asia. The signs of wealth are everywhere.

I see more people drinking $3 cups of Starbucks coffee in Shanghai than I see in Seattle. I see more ladies clutching expensive Louis Vuitton handbags in Beijing than in Boston. I see more iPods and iPhones in Hong Kong than in Houston. And I see more $200,000 Bentleys on the streets of Wuhan than in Palm Beach, Florida.


The reason is simple: Asians have the money to spend, and they absolutely love western luxury goods. According to Asian consultant Bain & Company, the future for luxury goods retailers in Asia has never been brighter. Bain & Company just updated its outlook for the luxury goods sector, and it’s expecting big things this year.

Bain expects sales of luxury goods — high-end apparel, accessories, watches, and jewelry — to hit $236 billion in 2010, up from $214 billion in 2009.

“After the crisis a new luxury era is emerging,” Bain said.

In a separate study, Altagamma, the Italian luxury trade group, said it expects the luxury goods industry’s profits to increase by 15% in 2011.

“In 2011 we are going to witness even better growth. Global consumption in 2011 should be significantly close to the record levels of 2007,” the group said.

Luxury goods sales in China are expected to increase by 30% to $12.8 billion, while sales in the entire Asia-Pacific region will grow by 22%. Sales in stores directly operated by makers of luxury goods will jump by 20%, and Bain expects as many as 350 new stores to be opened by the end of 2010 in Asia.

China is certainly the hottest country, but it isn’t the only Asian country enjoying rapid economic growth. The World Bank raised its 2010 growth forecast for Southeast Asia — Indonesia, Malaysia, the Philippines, Thailand, Cambodia, Laos, Mongolia, Myanmar, Brunei, Papua New Guinea, Timor Leste, Vietnam, Hong Kong, South Korea, Singapore, Taiwan, and the Solomon Islands — by 0.2% points to 8.9%. That’s up from the 7.3% last year.

U.S. Luxury Spending Is Way Down!

Luxury spending contracted 8% in 2009 — the most since at least 1995 — because of the recession. The United States, by the way, suffered the worst drop of all the luxury goods markets, with sales crashing 15% despite some deep price cuts by desperate retailers.

You have to look at forecasts from consultants and trade groups with a skeptical eye. I’d much rather look at the cold, hard sales numbers from the companies themselves. Let me tell you, those numbers are VERY impressive.

  • Asians are buying more flat-screen TVs, cars, and Bordeaux wines of any region in the world this year.
  • LVMH Moet Hennessy Louis Vuitton SA, the world’s largest luxury-goods maker, reported that its Q3 sales rose 24% as wealthy shoppers bought watches and handbags like crazy. LVMH saw its sales in China increase by 27%
  • Burberry Group, the maker of expensive coats and leather goods, said its sales rose 11% in the three months through September, led by growth in … you guessed it … Asia. Burberry sales in China increased by 25% in the first six months of the year while tourists from China were its biggest customers in Paris, New York and London. It has so many Chinese shoppers that it has hired Mandarin-speaking clerks at most of its stores.
  • Swiss watch shipments, a key barometer for the watch industry, are up by 14% in 2010. Sales up are by 174.1% in Morocco, 157.4% in Saudi Arabia, 68.2% in United Arab Emirates, and 49.5% in China.

Investing in the right luxury retailers could certainly be a very lucrative move. Who do I think will be some of the biggest luxury goods winners? Here’s a list of companies that are traded on a U.S. stock exchange, including the over-the-counter pink sheets market:

LVMH Moet Hennessy (LVMHF.PK) is a luxury conglomerate with handbags, fashion accessories, champagne, jewelry, and watches.

Hermes International (HESAF.PK), best known for its sky-high priced scarves, is a fashion powerhouse selling leather goods, perfume, jewelry, watches, shoes, and apparel. PPR SA (PPRUF.PK) is the holding company for Gucci and Yves Saint Laurent.

Burberry Limited (BBRYF.PK) is a famous British designer of coats and leather goods.

Porsche Automobile Holdings (POAHY.PK) has a kicker: It owns 18% of Volkswagen.

Tiffany & Co. (TIF), the iconic purveyor of the little blue box and high-end jewelry.

Harry Winston Diamond Corp. (HWD) is known as the jeweler to the stars.

Coach (COH) handbags look like a bargain compared to Louis Vuitton but are big, big sellers in Asia.

Polo Ralph Lauren (RL): The Chinese love the little polo pony more than Americans.

If you are more of an exchange traded fund (ETF) investor, there is an ETF that you could consider.

The Global X China Consumer ETF (CHIQ) captures just about every segment of the Chinese consumer market: Retailing 28%, food 22%, consumer services 20%, autos 12%, and health care 8%. Largest holdings include Dongfeng Motor Group, Tsingtao Brewery, Air China, Li Ning, Wumart Stores, and China Foods. Those aren’t exactly luxury retailers but it is the purest Chinese consumer-focused ETF you can find.

Until Sept. 10, you could have invested in Claymore/Robb Report Global Luxury (ROB). This ETF never caught on with investors and was shut down last month. While it wasn’t focused on China, it invested in several of the high-end, luxury companies that I discussed above.

Its holdings included just about everything a billionaire needs: Luxury hotels, designer clothes, overpriced jewelry, fashion accessories, and fine liquors/wines:

Bayerische Motoren Werke

CIE Financiere Richemont

Daimler AGN

Hermes International

Luxottica Group

LVMH Moet Hennessy

Pernod Ricard

Shiseido Company

Swatch Group

Objectively analyzing luxury stocks isn’t easy for me. I’m just not a Gucci kind of guy, and you’ll never find me shopping on Madison Avenue or Rodeo Drive. You might, however, find me in Wal-Mart or K-Mart.

If you’re like me, you need to put yourself in the right frame of mind to understand the luxury market. Put yourself in Paris Hilton’s (Gucci) shoes, and you’ll be on the right track.

Spending $1,000 on a pair of high heels, $5,000 for a handbag, $20,000 for a watch, or $100,000 for a car may seem like insanity to us, the newly minted Chinese millionaires are so consumed with ‘label lust’ that investing in the stocks of luxury goods providers could be one of the most sparkling investments you could make.

Best wishes,

Tony

This investment news is brought to you by Uncommon Wisdom. Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. From time to time, the authors of Uncommon Wisdom also cover other topics they feel can contribute to making you healthy, wealthy and wise. To view archives or subscribe, visit http://www.uncommonwisdomdaily.com.


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