Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 245

Investors profit from demand for luxury goods

Australians may be busy paying for groceries rather than a new Ferrari, if last month’s Bureau of Statistics figures showing a strong rise in the cost of living is anything to go by, but local investors can benefit from demand for luxury goods, even if it’s not to park a Ferrari in the driveway, yet.

Some luxury goods companies have the brand equity to keep their prices high, and the business strategy to benefit from structural growth in global economies. This is aligned with Hyperion’s investment philosophy to take a bottom-up approach to invest in extreme quality companies with solid fundamentals and structural growth opportunities, and why global equities should be front of mind for Australian investors.

Why quality luxury goods stand out

Where do we see value at the moment?

One sector we particularly like is luxury goods, which continues to benefit significantly from the growth of economies like China and India, and the rise of the middle class.

However, not all luxury goods are created equal. It’s important to focus on high-quality businesses with strong growth prospects, large and growing addressable markets, low levels of gearing, and predictable medium to long-term earnings streams. Two such companies are French high-fashion house Hermes and Italian car manufacturer, Ferrari.

Both companies have been around for some time, Hermes since 1837, and Ferrari since 1947. Unlike some of their competitors, both have eschewed offshore manufacturing for home factories where they can control the quality their brands rely on.

Both companies have strong brand equity which gives more pricing power than any of their competitors. Both produce items which are considered significant status symbols, and their strategy of strictly limiting supply has seen demand for their products hold up strongly. After the GFC, Ferrari sales fell a tiny 4%, compared with other ultra-luxury cars (except Lamborghini), which fell 40% over the same period. The typical wait for a Ferrari is between 18 to 24 months, and, even after three years, a Ferrari typically retains 93% of its value and will actually increase in value after 20 years.

The power of the Ferrari brand means that its competitive position in its market is secure, its pricing power will not diminish, and its capacity to profit from a growth in demand is second to none. And, in our view, these markets remain underpenetrated, giving a lot of capacity for growth.

Hermes has a similar story and a similar business model. When President Xi Jinping began implementing anti-corruption reform in China in 2012, the crackdown on gift-giving saw a significant drop in retail sales generally, and in sales of luxury goods in particular. As a result, 2013 was a difficult year for many luxury retailers in China. Growth in sales fell from 7% in 2012 to 2% in 2013, according to a report by Bain & Co, and average spending of China’s high-net-worth individuals also decreased significantly. Yet, against this backdrop of difficult retail conditions and falling sales in luxury goods, Hermes was one of the few not affected, and was in fact able to grow sales by 16%.

The importance of looking beyond our own borders

Australian investors have long had a strong domestic bias when it comes to equity investment, and historically, quality Australian businesses have had the ability to produce growing and sustainable earnings. However, overseas markets offer a much larger universe of stocks and a greater diversity in industries to choose from. The economies in which these companies operate have higher growth potential. This means addressable markets are typically larger than those on offer in Australia (often significantly larger). In many cases, internationally-based companies offer superior economics and scale and better long-term growth pathways.

As the world economies are growing, they are also becoming more accessible to investors. Before the digital revolution and advances in technology, Australian investors were at a significant disadvantage when it came to accessing in-depth information and on-the-ground intelligence about international companies. The time difference and our physical location at the end of the world meant investors on the spot had a real advantage.

The evolution of technology changed all that. Australia’s physical location is not the barrier to investment it once was, and Australian investors now have the ability to trade and access information 24 hours a day. This doesn’t mean it’s no longer important to travel to overseas markets, and to talk to company management face-to-face, but it does mean that the ability to identify quality growth businesses both here and overseas has been enhanced.

The numerous quality-investment opportunities on offer globally are often better from a relative value perspective. With a few exceptions, global companies are of a higher quality than their Australian counterparts, and current five-year earnings forecasts are also higher – all of which, translates into stronger returns for investors with relatively lower levels of risk.

The bias towards the home market has served many well, but the opportunities on offer in the larger, more diverse economies overseas should improve the risk/return profile of any portfolio if the right stocks are chosen. International companies with large addressable markets, market dominance and consistent earnings, like luxury goods providers Hermes and Ferrari, are exceptional businesses, that can produce strong, sustainable returns to investors over the medium to long term. And it’s those fundamentals, regardless of domicile geography, that will drive investors’ wealth.

 

Mark Arnold and Jason Orthman are the Chief and Deputy Chief Investment Officers respectively at high-conviction equities manager, Hyperion Asset Management. This article does not consider the circumstances of any investor.

 


 

Leave a Comment:

RELATED ARTICLES

Two companies with clear competitive advantages.

How much will you risk to feel comfortable?

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.