Luxury is a long-term investment

Until recently, emerging markets were unquestioned safe havens for the rapid expansion of luxury goods brands. They thrived easily as burgeoning middle classes in the Middle East and the BRICs found themselves with disposable incomes to play with for the first time. They happily guzzled anything and everything associated with big brands, aspiring to the luxurious lifestyle associated and promoted by them.

But now a wave of new consumer sophistication is sweeping China, India and other developing nations, meaning retailers have to work harder to encourage them to buy in the same quantities. And a shrinking global economy has caused a squeeze on the middle class purse – the same story we know in the developed world.

So for luxury brands it’s a case of get smarter or sink, and this has put fund managers hard at work cherry picking companies they know can continue to sell in more hostile environments – and ultimately provide investors with healthy returns for the long term.

Analysts are advising going against market sentiment brought on by these changing retail conditions and buy in the dip. They also say if you've already got exposure to luxury goods funds in your portfolio, don't let the scaremongering panic you into selling. Reassuringly, their reasoning has multiple strands.

James Sutton, client portfolio manager at JP Morgan, says companies having a crisis often blame their turmoil on wider market trends, even if they don't really exist. "The exodus of the strong run for luxury goods gets predicted every time a major name runs into trouble, for example when Tiffany the jeweller had problems twice earlier in the year. But it never comes to fruition."

It turns out most analysts are confident Burberry's 19 per cent share devaluation last week was an individual case, rather than an omen for the decline of other flagship brands. Mr. Sutton blames the company's short term financial woes on a misplaced advertising campaign stunting sales of its winter collection.

Interestingly though, analysts' reactions to Burberry has been mixed. Chief investment officer at Dominion, Arjen Los, has completely ditched holdings in the company from its CHIC fund as a result of the news, whereas JP Morgan analysts have upgraded it.

Analysts also say you need to be hungry for a decent sized helping of risk if you're going to invest in luxury goods, but you can get some extra safety by picking funds with high exposure to super high-end luxury brands. They believe top end brands such as Gucci, Louis Vuitton and Prada are stronger stock than the likes of Burberry and Mulberry, which brush the top end of what could be classified as 'high street'. This is because even if they are hit by flailing share prices in their portfolios as a result of global economic fall out, the super rich will still have sufficient spare income to afford to shop with top brands. Mr. Sutton profusely dismisses claims the luxury 'bubble' is about to 'burst' because disposable income ratios in relation to the price of luxury goods are already so high.

They're not saying all luxury brands will be completely immune to world events through. Brands on the verge of being 'top end high street' do face a real threat because of a new trend for thrift - brought on by shrinking middle class wages both in developed and emerging economies. These low end luxury brands are feeling the strain from 'value for money' competitors such as Marks & Spencer, as a fall in wages for the masses means the difference between affording luxury and settling for high street clobber.

But there is a major bonus point for investing in luxury goods companies that most investors are unaware of. And that’s retail tourism. Investors have become concerned about slowing 'same store' sales growth of up to 30 per cent in China, which most analysts and investors assume is driven by a deteriorating macro backdrop. But research from Global Blue shows up to 40 per cent of luxury retailers' sales now come from tourists buying goods in Europe and America. This may appear outlandish at first, but when you consider the weak Euro means buying in Europe is now 45-47 per cent cheaper than buying in China, you can see an obvious incentive. Luxury retailer Louis Vuitton Moet Hennessey announced 30 per cent of its Q1 earnings in Europe was from Chinese tourists.

You can invest in luxury through growth funds that invest in luxury goods companies among other stocks, or through specialist funds. Analysts say growth is a good way to get exposure to luxury goods companies because they tend to reinvest money heavily in order to maintain the vital asset at the crux of their business - the brand.

Sheridan Admans, investment research manager at the Share Centre, says: "You need to be comfortable with risk to invest in luxury goods funds, but you do have time on your side as the market is showing little sign of picking up anytime soon. Now's a good time to drip feed money into funds of your choice."

Current global volatility may have knocked investor confidence in luxury goods, and cyclical market movements in China have drawn your attention to vulnerabilities in companies you didn't expect to trip up. But despite the pessimism, both company strategy and consumer trends are evolving in line with the new economic landscape. And this presents a real opportunity.

If you're open to risk - get in now while it's cheap - maintaining the view returns will remain strong over the long-term and have far more growth potential than businesses relying solely on developed markets.

Top 20 funds with the most exposure to luxury goods

There are several ways you can invest in luxury goods, but if you're looking for some extra security for your long-term returns, your options become a bit narrower. We recommend J.P.Morgan's Global Consumer Trends fund which will give you a broad investment in the sector, or Morgan Stanley's UK Global Brands fund if you're looking for something more specific. Both have TERs of less than 2 per cent and have a solid track record over the long term, having consistantly thumped the IMA Global over a five year period.

Our favourite funds for luxury goods investment

Also see: Finding investment opportunity in change