Is It Time to Pile Back into the Global Luxury Market?

global luxury market

The global luxury market took several hits in 2020 from the COVID-19 crisis. The industry shrunk by 20% to 22% to around $1 trillion. However, that figure is the same valuation for the industry as in 2015, according to a study by Bain & Company. The luxury experiences segment (hotels, cruises, upscale dining) was hit the hardest (-56%) due to the global tourism slump. The market with personal luxury goods like watches and clothing suffered a 23% decline. That was the sharpest decline since 2009.

On the other hand, sales of luxury cars were relatively resistant to the crisis, falling by only 8% to 10%. Geographically, only the mainland China region ended the year with growth (+45%). Due to the collapse of tourism, local consumption gained importance and accounted for 80 to 85% of sales. Online sales for luxury goods nearly doubled from 12% to 23%.

By 2025, the online channel is expected to become the most important sales channel for luxury goods. The global luxury market’s future depends on how the pandemic, macroeconomic factors, global tourism, and consumer confidence will develop. There is a wide range of conceivable scenarios.

Bain & Company’s growth forecast for 2021 ranges from 10% to 19%. Globally, operating profit has shrunk by up to 60% over the past year, and operating margin has slumped from 21% to 12%. However, we can expect up to 50% of the profit decline from 2020 to recover this year. Within the next three years, we can expect the recovery to gain momentum, with 2019 sales levels anticipated by early 2023 at the latest.

Historically High Valuations in the Global Luxury Market

Optimism has returned among investors in this market. A look at share price trends and valuations reveals that investors expect a quick end to the pandemic and a fast, sustainable recovery in sales. Driven by strong sales in the U.S. and mainland China, many companies performed better than initially feared in H2 2020.

The first-quarter figures were very promising in this regard, and some companies’ sales levels were already back above the pre-crisis year 2019. The sustainability of the growth is the question. One possible explanation for the high demand for luxury items is that they were in greater demand due to a lack of alternatives. Alternatives such as traveling, restaurant dining, shopping and strolling were/are limited in many countries.

However, as the impulse progresses, the effect described could fade, and growth could lose momentum. However, investors do not expect this to happen. Therefore, expectations for future growth and margin development are high.

Valuations have reached historically high levels for many companies, so caution is called for following the sharp price rises and valuation expansion. As a result, the room for error or unmet expectations has become smaller. Historically high or near-high valuations based on 2021 P/E ratios have, for example, LVMH, Swatch, and Estée Lauder. P/E ratios are in the high double digits from above 30 to 70. As we know, valuations are stretched, and the markets may have already priced in any expected growth. We’ll circle back on gold and silver – speaking of luxury goods – this weekend.

Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.
Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.

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