With Brexit and a general election looming, the level of uncertainty in the UK seems unprecedented. As investors, we need to think carefully about what we invest in, and how our investments would hold up in the event of an economic slowdown.
One sector that has shown a remarkable resilience over the years is the luxury sector. Customers in this sector are typically wealthier and higher earning than the UK average – known as high net worth individuals – and are less likely to be affected by a downturn.
The nature of the market also provides a good buffer. Luxury markets are often characterised by far greater demand than supply, which protects pricing and sales, even in adverse conditions. The fact that many luxury products represent emotional, rather than rational purchases, along with the brand strength of the leading players, also adds to the resilience of the sector.
Luxury watches
Watches of Switzerland Group (LSE: WOSG), which listed on the London Stock Exchange earlier this year, specialises in selling luxury watches in the UK and US. It is the market leader in the UK, where it sells nearly £600m worth of luxury products. Group sales have grown by around 20% annually over the last five years, a trend which continued into the current financial year, where sales rose nearly 18% in the first quarter, compared to the prior year.
The luxury watch retailer now has 128 showrooms, recently opening two flagship stores in central New York. A quarter of the group’s sales now come from the US, where sales have more than doubled in the last year, and look set to grow strongly for the foreseeable future.
If investing was just a case of picking companies that will grow, then this would be a no-brainer. I think business performance is only going to improve, in terms of sales growth and widening profit margins. Furthermore, I think sales will hold up, whatever happens in the wider external environment.
But I have a problem with the valuation. The shares trade on a price-to-earnings ratio (P/E) of over 30 times, even when using an adjusted profit figure. When this is combined with a high debt level, I find it unlikely that the shares will push on much from here any time soon.
Luxury fashion
Staying within the luxury sector, I think Burberry Group (LSE: BRBY) is a better option.
Since hiring a new chief creative designer last year, the brand has made a conscious move to become more upmarket. The move has gone down well with customers, with new collections achieving double-digit sales growth in the first half of the year.
Total revenue was up by 5% in the first half, and net profit rose by 13% from the prior year. Revenue even increased in the Asia Pacific region, which is amazing considering the disruptions in Hong Kong – one of the main luxury markets in the world.
As well as boasting stable revenues and profits, Burberry also achieves an impressive return on capital employed of 20%. With a P/E ratio of around 23, I think the shares have the potential to perform well in the short and medium term.