Julius Baer: Luxury stocks remain attractive in the long-term

The positive development of the global economy contributed to this expansion, but more importantly the number of people who can be classified as wealthy grew by 7 per cent a year during this period.

In the first nine months of 2008, there was still double-digit growth in sales of luxury goods. Growth has now weakened due to the sharp fall in equities and general negative market news.

However, for a long-term investor, investment in luxury stocks could make perfect sense. The share prices of many luxury goods companies have nearly halved in value since the beginning of 2008. Many stocks already reflect highly negative expectations for 2009. Luxury goods companies have a strong advantage in the current climate - their balance sheets are very strong, with many carrying no debt at all.

The best opportunities for buying into luxury goods shares arise when consumer panic is at its height. For example, people who invested in luxury goods shares in 2002 when the sector was suffering from the SARS crisis saw their investment virtually double in the following three years.

While a downturn in the economy as a whole certainly has an impact, the luxury goods sector shows more resistance than general consumer stocks. This reflects the fact that even in difficult times, there is little change in the consumption patterns of the rich.

In a weakening market customers place greater emphasis on the quality of the product and tend to opt for established names. It is the market leaders that are particularly likely to win through – for example Hermes in handbags and silk scarves, or Swatch with its Breguet, Blancpain and Omega watches.

We expect the number of wealthy people in Asia and Eastern Europe to continue to grow and this will support luxury companies through the current economic crisis. Luxury goods companies now have a much more diverse customer base, with around 30 per cent of turnover coming from emerging economies. We expect sales of luxury goods in emerging markets will continue to rise in 2009.

Strong brands also have the advantage of pricing power and most enjoy very high margins. In recent years, price rises have exceeded inflation and we expect the best brands will continue on this path.

We believe the long-term outlook for luxury stocks remains very attractive, particularly at current valuations.

Andrea Gerst and Scilla Huang Sun are asset managers at Julius Baer. The views expressed here are their own.