Market commentary by eToro analyst for Romania, Bogdan Maioreanu
Inflation is increasing all over the world triggered by energy, food and supply chain issues. In the European Union, Romania just posted the fourth largest inflation figure for April, 13.8% year on year, after Estonia – 18.8%, Lithuania – 16.8% and Czech Republic 14.2%.
For many households across the world, rising inflation poses a significant challenge. Higher prices can erode the value of real wages and savings, leaving households poorer. But there is a high income, high net worth category that is less sensitive to increase in prices and consume luxury products. In a challenging environment the luxury brands are posting strong sales and good prospects despite the rise in prices, showing resilience to the high inflation and shifts in customer buying habits.
A study of the Berlin University concluded that in case of unanticipated inflation increase, the wealth distribution will become more unequal as this reduces real income of the low and medium income households and increases profit of high income households. If we are looking at how inflation is affecting the spending of the low income families we are seeing that most of the income goes on food and housing leaving less money for discretionary spending. For high income households it is the opposite, disposable income being high enough to allow spending on discretionary items and for investing.
Some of the discretionary items fall into luxury brands spending. In 2019 the Luxury brands market was estimated at around 1.268 trillions Euro. But the 2020 pandemic that halted the world economy for a few months and created havoc in the supply chains, brought a change in spending habits of the rich, decreasing the total luxury market with 20% up to one billion Euro. The largest decreases of 60-70% were seen in the industries affected by the pandemic like the luxury hospitality and luxury cruises. Personal luxury goods sales also decreased by around 20%. The market recovered in 2021 but it is still below the 2019 levels. According to a report by Bain &Co, the pandemic has changed the global map of luxury. As tourism collapsed up to 90%, spending on personal luxury goods by consumers in their home markets picked up the slack, rising up to 60% between 2019 and 2021. Asia was the leading region in 2021 and is forecasted to remain so, followed by the Americas, Middle East and Europe.
If we look at the segments that compose the luxury industry we can see a rebound of personal luxury goods that in 2021 exceeded by 1% the 2019 result, reaching 283 Billion Euro.
Overall, spending shifted from intangible experiences to tangible products in 2021. That’s visible in the different recovery trajectories of luxury goods vs. luxury experiences. The steepest recovery in 2021 belonged to personal luxury goods and furniture/housewares, now marginally ahead of 2019 levels. Experience-based goods are not far behind but should be the last to regain their 2019 peak. The report sees that happening in 2024, but much depends on the resumption of international tourism and business travel.
Sales of luxury cars, the biggest portion of the overall luxury market, beat their 2019 record, reaching €551 billion, 9% more than 2020 at current exchange rates, and 1% up from 2019. Asian outperformance helped sales weather supply chain disruption.
While not all segments have recovered at the same pace, the report is forecasting a healthy growth for the personal luxury goods market in the medium term. They expect sales recovery to continue over the next four years, with the personal luxury goods market reverting to annual growth rates between 6% and 8% until 2025.
The Ukrainian conflict and the sanctions have marginally impacted the luxury industry. Companies have closed their Russian shops. Russian nationals are estimated to account for less than 1.5% of the sales of LVMH SE – brand owner of Louis Vuitton and Dior, according to Morgan Stanley. More damaging to the industry looks to be China lockdowns. The company said it’s currently seeing a negative impact on demand for luxury products due to lockdowns but it is confident about medium to long-term demand in China once the situation gets back to normal. Kering, the owner of luxury brands like Gucci has seen its sales drop due to the same issues with China.
Investors are looking toward the luxury industry as a possible asset to hedge risks brought by inflation. Luxury brands are showing strong sales with good forecasts and the possibility to transfer these cost increases to the wealthy buyers that are less price sensitive. eToro launched a LuxuryBrands smart portfolio geared toward the luxury industry that includes companies like LVMH, Hermes, Richemont Group that owns Cartier and watchmaker IWC but also Ferrari, BMW, Mercedes and companies from the luxury experience segments.
Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.
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