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.

 

  •   21 March 2018
  •      
  •   

 

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

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

Investment strategies

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

Property

The housing market is heading into choppy waters

With rates on hold and housing demand strong, lenders are pushing boundaries. As risky products return, borrowers should be cautious and not let clever marketing cloud their judgment.

Investment strategies

Dumb money triumphant

One sign of today's speculative market froth is that retail investors are winning, and winning big. It bears remarkable similarities to 1929 and 1999, and this story may not have a happy ending either.

Retirement

Can the sequence of investment returns ruin retirement?

Retirement outcomes aren’t just about average returns. The sequence of returns, good or bad, can dramatically shape how long super lasts. Understanding sequencing risk is key to managing longevity risk.

Strategy

How AI is changing search and what it means for Google

The use of generative AI in search is on the rise and has profound implications for search engines like Google, as well as for companies that rely on clicks to make sales.

Survey: Getting to know you, and your thoughts on Firstlinks

We’d love to get to know more about our readers, hear your thoughts on Firstlinks and see how we can make it better for you. Please complete this short survey, and have your say.

Investment strategies

A framework for understanding the AI investment boom

Technological leaps - from air travel to computing - has enriched society but squeezed margins. As AI accelerates, investors must separate progress from profitability to avoid repeating past mistakes.

Economy

The mystery behind modern spending choices

Today’s consumers are walking contradictions - craving simplicity in an age of abundance, privacy in a public world. These tensions tell a bigger story about what people truly value and why.

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.