Luxury brands: paying over the odds or a sound investment?

I'll admit that I'm not new to the concept of accessorising, but having just spent the past couple of weekends looking for a new car with my husband, I have to say I hadn't realised it extended to automotives. Who knew that BMW has partnered with Montblanc to make the “'next generation in luxury wearable technology”? Certainly not me. Apparently having a stylish key you can wear on your wrist that will open car doors and start the engine for you is a good reason to pick the new 5 series! I think not. I just need a bigger boot.

But it did get me thinking about luxury brands and the investment opportunities they offer. When China was growing apace, luxury goods were discussed regularly, as companies such as Diageo and Burberry moved to sell their wares. However, since China, and indeed the global economy, has slowed, luxury goods have somewhat come off the boil and stagnated.

Could things be about to change?

One of the big benefits of investing in luxury brands at the moment is that that they are able to pass on the higher costs of inflation - and then some. For example, Sonos (they make high-end speakers) increased their prices by a huge 25% last month. This follows on from Apple (slightly less high-end, but still a luxury for many) increasing prices by 20% in October 2016. Burberry also did very well last year when the decline in sterling attracted more people to the UK and sales boomed.

Another good growth area is in premium sports goods. People aren't necessarily exercising more, but they are wearing the outfits! The other thing to remember is that luxury brands aren't all about goods - they also include luxury holidays and travel and aspirations in general. The world's middle classes are increasingly affluent and willing to pay for these things.

There are risks though. When it comes to travel and holidays, the Zika virus is a threat, as is terrorism. Trump's possible trade war could also put a spanner in the works.

What the fund managers have to say

I spoke to Caroline Reyl recently, manager of Pictet Premium Brands fund. She said that consumers today evolve in a world that is fast paced, transparent and flexible, and the brands in which they invest must reflect these factors. Time has become the ultimate "luxury" we all try to maximize. This is why, in 2017, she will continue to invest in companies that demonstrate both operational excellence and a superior capacity to innovate and engage with consumers, either digitally or through experiences. She thinks these companies are well positioned to grow profitably after three years of adverse conditions.

If you want to take advantage of luxury goods closer to home, Neptune UK Mid Cap has exposure to a few stocks. Mark Martin, the manager, commented recently that Brexit clearly gave the UK luxury sector a material boost: London has always been a magnet for global tourism, but the weakness of sterling meant that UK luxury products were effectively ‘on sale’ for overseas buyers.

by Juliet Schooling Latter, research director, Chelsea