Market Memo: International opportunities are bathed in luxury this year

A reaccelerating Chinese economy and further improvement in already strong Southeast Asian countries should bode well for automakers, airlines, energy and resource-oriented companies serving this growing region. But one of the more compelling international investment themes arising out of Asia this year could be luxury goods and spirits.

There is enormous demand in Asian emerging markets for high-end products and Western brands—an outgrowth of  expanding personal wealth and the upper-income classes not only in China and Hong Kong but also in Singapore, Malaysia, Thailand, Indonesia and the Philippines. Jaguar Land Rover, for example, said 2012 sales jumped 30% year-over-year, led by strong demand in China, now its largest market. On a much smaller scale, luxury watches and jewelry also represent promising opportunities within the premium-goods segment.

One reason is the explosion in Chinese tourism and the concomitant demand it generates for gifting, a practice deeply engrained in the Chinese culture. Rupert Hoogewerf, chairman of a Shanghai publisher of magazines for China’s wealthy, likens the Chinese passion for gift giving to a “love affair’’ and said in  a USA Today article published a year ago that the money spent in China on gift giving “is staggering compared to the West.’’ Consulting firm Bain & Co. estimates that personal and business gifts account for a quarter of luxury goods sales in China, already the second-largest market in the world for luxury goods, surpassing Japan and trailing only the United States.

China’s gift-giving passion
Chinese travelers account for 43% of global watch purchases made by tourists, a share that likely will increase given that Chinese outbound travel is projected to increase by at least 14% in each of the next five years. Overall, the average Chinese luxury consumer spends $18,650 during a trip, with an average transaction price of $1,127. Among companies we believe are well positioned to benefit from this trend is Switzerland’s Richemont. Its portfolio includes some of the most prestigious brands in jewelry and watches—Cartier, Piaget, VanCleef & Arpels, Vacheron Constantin, Jaeger-LeCoultre and IWC—as well as top-line writing instruments, accessories and leather goods brands Montblanc, Dunhill and Lancel.

Better global growth also should lift the spirits sector. While consumers drinking habits are not cyclical, consumers to tend to upgrade their brands and spend more during more prosperous times. This suggests that as the international economy improves, demand and consumption of higher-end spirits is likely to accelerate significantly. This is particularly true in emerging markets, where more affluent consumers have acquired a taste for expensive Western spirits. This may bode well for companies such as Britain’s Diageo Plc, which owns or controls the world’s top premium Scotch and Canadian whiskey, vodka, gin and liqueur brands, and also owns the Guinness beer label and a major stake in Moet Hennessy.

There are, of course, many ways for investors to try and capitalize on a growth in China and Southeast Asia. But for the money, makers of the more expensive high-end brands could prove to be a bargain.