Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 245

Investors profit from demand for luxury goods

Australians may be busy paying for groceries rather than a new Ferrari, if last month’s Bureau of Statistics figures showing a strong rise in the cost of living is anything to go by, but local investors can benefit from demand for luxury goods, even if it’s not to park a Ferrari in the driveway, yet.

Some luxury goods companies have the brand equity to keep their prices high, and the business strategy to benefit from structural growth in global economies. This is aligned with Hyperion’s investment philosophy to take a bottom-up approach to invest in extreme quality companies with solid fundamentals and structural growth opportunities, and why global equities should be front of mind for Australian investors.

Why quality luxury goods stand out

Where do we see value at the moment?

One sector we particularly like is luxury goods, which continues to benefit significantly from the growth of economies like China and India, and the rise of the middle class.

However, not all luxury goods are created equal. It’s important to focus on high-quality businesses with strong growth prospects, large and growing addressable markets, low levels of gearing, and predictable medium to long-term earnings streams. Two such companies are French high-fashion house Hermes and Italian car manufacturer, Ferrari.

Both companies have been around for some time, Hermes since 1837, and Ferrari since 1947. Unlike some of their competitors, both have eschewed offshore manufacturing for home factories where they can control the quality their brands rely on.

Both companies have strong brand equity which gives more pricing power than any of their competitors. Both produce items which are considered significant status symbols, and their strategy of strictly limiting supply has seen demand for their products hold up strongly. After the GFC, Ferrari sales fell a tiny 4%, compared with other ultra-luxury cars (except Lamborghini), which fell 40% over the same period. The typical wait for a Ferrari is between 18 to 24 months, and, even after three years, a Ferrari typically retains 93% of its value and will actually increase in value after 20 years.

The power of the Ferrari brand means that its competitive position in its market is secure, its pricing power will not diminish, and its capacity to profit from a growth in demand is second to none. And, in our view, these markets remain underpenetrated, giving a lot of capacity for growth.

Hermes has a similar story and a similar business model. When President Xi Jinping began implementing anti-corruption reform in China in 2012, the crackdown on gift-giving saw a significant drop in retail sales generally, and in sales of luxury goods in particular. As a result, 2013 was a difficult year for many luxury retailers in China. Growth in sales fell from 7% in 2012 to 2% in 2013, according to a report by Bain & Co, and average spending of China’s high-net-worth individuals also decreased significantly. Yet, against this backdrop of difficult retail conditions and falling sales in luxury goods, Hermes was one of the few not affected, and was in fact able to grow sales by 16%.

The importance of looking beyond our own borders

Australian investors have long had a strong domestic bias when it comes to equity investment, and historically, quality Australian businesses have had the ability to produce growing and sustainable earnings. However, overseas markets offer a much larger universe of stocks and a greater diversity in industries to choose from. The economies in which these companies operate have higher growth potential. This means addressable markets are typically larger than those on offer in Australia (often significantly larger). In many cases, internationally-based companies offer superior economics and scale and better long-term growth pathways.

As the world economies are growing, they are also becoming more accessible to investors. Before the digital revolution and advances in technology, Australian investors were at a significant disadvantage when it came to accessing in-depth information and on-the-ground intelligence about international companies. The time difference and our physical location at the end of the world meant investors on the spot had a real advantage.

The evolution of technology changed all that. Australia’s physical location is not the barrier to investment it once was, and Australian investors now have the ability to trade and access information 24 hours a day. This doesn’t mean it’s no longer important to travel to overseas markets, and to talk to company management face-to-face, but it does mean that the ability to identify quality growth businesses both here and overseas has been enhanced.

The numerous quality-investment opportunities on offer globally are often better from a relative value perspective. With a few exceptions, global companies are of a higher quality than their Australian counterparts, and current five-year earnings forecasts are also higher – all of which, translates into stronger returns for investors with relatively lower levels of risk.

The bias towards the home market has served many well, but the opportunities on offer in the larger, more diverse economies overseas should improve the risk/return profile of any portfolio if the right stocks are chosen. International companies with large addressable markets, market dominance and consistent earnings, like luxury goods providers Hermes and Ferrari, are exceptional businesses, that can produce strong, sustainable returns to investors over the medium to long term. And it’s those fundamentals, regardless of domicile geography, that will drive investors’ wealth.

 

Mark Arnold and Jason Orthman are the Chief and Deputy Chief Investment Officers respectively at high-conviction equities manager, Hyperion Asset Management. This article does not consider the circumstances of any investor.

 

  •   21 March 2018
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Two companies with clear competitive advantages.

How much will you risk to feel comfortable?

banner

Most viewed in recent weeks

The ultimate superannuation EOFY checklist 2026

Here is a checklist of 28 important issues you should address before June 30 to ensure your SMSF or other super fund is in order and that you are making the most of the strategies available.

Noel Whittaker’s take on the budget

Marketed as a fix for inequality and housing affordability, the latest budget instead delivers a tangle of tax changes that leave everyday Australians worse off.

Australia has no death duties. Technically.

Australia may not levy formal death duties, but a growing web of tax measures is quietly shaping what wealth passes between generations. Now, the 2026 budget adds another layer.

Lithium's rally is real this time – but no-one trusts it

The lithium rally mirrors the early-2010s tech stock surge, with demand set to double by 2030. Supply has been slow to respond, creating a market deficit for future tech like humanoid robotics and solid-state batteries.

Welcome to Firstlinks Edition 662 with weekend update

The debate over the budget is increasingly shaped by frustration and perceptions of unfairness, rather than clear-eyed assessment of policy outcomes.

Two months into retirement

A retirement researcher's take on retirement and her focus on each of her six resource buckets to stay engaged during the transition and beyond.

Latest Updates

Are the government’s CGT changes better for young investors?

New CGT rules promise fairness, but could young investors lose out? A practical scenario reveals how changes impact deposit goals, investment choices, and long-term wealth building for the next generation.

Retirement

How to minimise tax with a will

Inheritance tax implications in Australia may surprise some, as poor estate planning without proper wills or trusts can lead to costly tax bills and delays for beneficiaries.

Investment strategies

AI can’t pick winning funds, but it can help you avoid losers

Machine learning has been touted a game changer investment management. But a new study overturns claims that AI can generate positive alpha in mutual funds. Here are some practical takeaways for investors.

Investment strategies

Inflation BIG picture: Boomers got lucky, next Gen not so much

A 150-year view shows inflation's upward bias, driven by shifting monetary regimes and war stocks. This marks an end to the low-inflation boom that enriched boomers and ushers in a higher-inflation era for younger investors.

Planning

Tax deductibility of financial advice improves affordability

A shrinking adviser workforce and rising costs are squeezing access to financial advice, just as demand surges. Expanded tax deductibility offers a modest but meaningful boost to affordability.

Retirement

Retirement in reality – 3 months in

A reflection on travel mishaps, smart decision-making, time pressures and rebuilding health habits. Three months in, here's how to navigate the surprising realities of life after work.

Taxation

Calculating the business cost of Australia’s new 'productivity tax'

Amid a national productivity crisis, new economic analysis finds the tax changes in the 2026 Federal Budget create Australia’s first-ever by design 'Productivity Tax', where young people will pay the biggest price.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.