Focus on Asia: Chinese consumers key driver of growth in luxury sector, says Swiss & Global

Chinese consumer demand for luxury goods is making the luxury sector a very attractive investment opportunity, says Swiss & Global Asset Management.

The firm’s research shows that the Chinese population is responsible for 56% of the growth in the luxury sector.

Although the number of millionaires in China still lags behind the three wealthiest countries in the world – the US, Japan and Germany – Credit Suisse exepects China to surpass Japan as the second wealthiest country in the world by 2016.

Compared to the rest of the world, Chinese millionaires are also much younger, making them a more suitable target for luxury brand advertising, and a large proportion of them are women.

A report by Hurun Wealth has found that the average age of China’s millionaires is just 39 years old, which falls 15 years below the global average. Two out of every five of them are women – the primary consumers of luxury goods.

Swiss asset manager Swiss & Global seeks to capitalise on this situation through the Julius Baer Luxury Brands Fund.

Since launch in 2008, the fund has significantly outperformed both the MSCI Daily TR Net World and the MSCI Daily TR World Net Consumer Discretionary indices.

Over three years, the fund is up nearly 75%, against 30% returns of the equity benchmark from Trustnet. This three year outperformance has won the fund a Lipper award this year as the best cyclical consumer goods fund.

Fund manager Scilla Huang Sun (pictured) points to three key factors driving the growth of luxury stocks – increasing consumption in emerging markets, the pricing power of luxury goods and the sound company balance sheets.

More than 90% of the growth in the sector comes from emerging markets. Along with China, Huang Sun names Russia, Middle East and Brazil.

And the money coming into luxury goods from emerging countries is only going to increase in the next decade, she says.

McKinsey and Company expects consumption in emerging markets to grow by 6.3% per annum by 2025, overtaking the 1.8% growth forecast in the developed world more than three-fold.

Much of this will be driven by a rapidly rising middle class, with China leading the pack. Over the past few years, salaries there have been increasing by 10%-20%, Huang Sun says.

As disposable incomes increase, the Chinese are expected to travel more and more outside Asia. In the decade since the start of the millennium, the number of Chinese outbound travellers has increased by 18% a year already, compared to a global increase of 3.4%.

Between 2011 and 2016, outbound travel from China is expected to increase by another 13% a year, with the number of Chinese tourists travelling to Europe more than doubling to 6.6m.

As they travel, one of their main objectives is to buy gifts to take back home, and they want to get their hands on all the best brands, Huang Sun says.

Thus, as the number of travellers rises, so will the spending. Merrill Lynch forecasts an annual increase in travel spending of 17%.

The London Luxury magazine has revealed that the average Chinese spend per store visit on London’s Bond Street is £600 – and they visit more than one store per shopping session.

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