French political risks unlikely to derail long-term profitability trends; buying opportunities remain. The share prices of major luxury brands, which are listed in France, were recently affected by political uncertainties that triggered a broad selloff across French stocks and bonds. While we do not rule out volatility from this week’s elections in France and the UK, global financial markets have demonstrated resilience and adaptability to geopolitical risks, such as trade tensions between the US/EU and China. We believe the electoral turmoil in France is a passing headwind that will not derail the long-term profitability of key luxury players, given their globally diversified sources of revenue. Given the sector’s mid- to high-single digit CAGR growth potential over the next five years, especially on the back of China’s recovery, we continue to see buying opportunities.

In the near term, we expect tailwinds from the 2024 Summer Olympics held in Paris between July and August, where demand for luxurious experiences will be amplified. Such products and services are plentiful in Europe, given the region’s rich history, sophisticated culture, and unparalleled commitment to quality and exclusivity. We maintain our constructive stance on European luxury players that demonstrate high brand desirability, strong pricing power, and superior profitability.

Evolving fortunes. From Hermès to Chanel, and Gucci to Louis Vuitton, the world of fashion has traditionally been dominated by heritage names patronised by generations of wealthy individuals. Today, driven by macroeconomic pressures and shifting consumer preferences, the global luxury sector has become increasingly nuanced. We had at the start of this year highlighted quiet luxury as an investment theme – instead of chasing the latest fad with loud prints, consumers continue to favour goods that emphasise excellent workmanship and branding that goes beyond an end-product. 1Q24 earnings results highlight the divergence between the financial performance of quiet luxury brands vs their ‘louder’ counterparts – Miu Miu and Church’s of the Prada Group emerged as winners, closely followed by Hermès with double-digit organic retail sales growth. In contrast, Kering's Gucci and Saint Laurent faced downturns.

Diversification in true fashion. Driven by momentum over artificial intelligence, US technology stocks – the Magnificent Seven in particular – have accelerated to outsized positions in the US stock market, giving rise to concerns over concentration risk. While we maintain that their share price performances are underpinned by strong earnings and balance sheets, portfolio diversification remains crucial – especially in an increasingly bifurcated world where geopolitical risk and asset correlation can rise abruptly. Luxury is a long-term structural growth sector poised to benefit from increasingly affluent populations, especially among millennials and Gen Zs. Given surrounding uncertainties, demand from ultra-high net worth spenders for quiet luxury brands will be less price-sensitive and more bolstered against economic downturns.

Soft-landing scenario beneficial for the sector, new frontiers oncoming. According to a study by Bain & Company in collaboration with Altagamma, the global luxury market had shown stable growth in the face of geopolitical and economic turbulence in 2023, exceeding a record EUR1.5tn. We see this growth continuing, driven by strong tourism inflows in 1Q24 to Europe and Japan; in particular, Japan flourished on the back of a weak yen and pent-up demand. In the meantime, investors evaluate how brands navigate subdued spending among Chinese shoppers, which is historically a key driver of luxury growth. With Fed rate cuts and a US soft-landing in sight, laggard sectors such as luxury and healthcare should benefit from a broadening market rally.

Aligned with our views in Luxury, Redefined published earlier this year, Bain and Altagamma’s research also highlight a continuing trend favouring experiential offerings over tangible goods; particularly notable is the steady growth in exclusive hospitality and gourmet dining, fuelled by a rebound in tourism and growing demand for immersive experiences. The price tag of something, while still relevant, is no longer the final arbiter of value – artisanal spirit and exclusivity are just as important in determining the success of a luxury offering.