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Will Trade War Fears Halt the Rally of Luxury Goods' Stocks?

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After a robust 2017, luxury goods so far have had an impressive 2018. Last year, luxury goods’ sales grew 5%. According to consultancy firm Bain & Company, the trend is likely to continue, driven by higher online expenditure and an increasing number of millennials spending on luxury goods.

However, the United States’ trade disputes with China and the EU have made investors jittery over the past few months. Given that China is one of the biggest luxury goods’ market, a full-fledged trade war could pose a threat to the sector. That said, luxury goods are still safe and aren’t that threatened like industrial companies and automakers.

Luxury Goods Market Continue to Thrive

The S&P Global Luxury Index is up 5% on a year-to-date basis, driven by increased spending by millennials on personal luxury goods. Per Bain & Company, global sales of luxury goods increased 5%, marking its best year in history. Moreover, the market is expected to grow between 6% and 8% in 2018, putting it between $231 billion to $327 billion.

Moreover, per a recent research report by Transparency Market Research (TMR), the global luxury goods’ market is expected to cross US$374.85 billion by the end of 2020. This market is primarily being driven by apparel and leather goods.

Millennials Drive Luxury Goods Sales

Incidentally, luxury goods’ sales are being supported open-handedly by millennials. Per Bain & Company, 2017 saw a generational shift in spending, with 85% of the sales of luxury goods being fueled by millennials.  

Social media platforms such as Facebook, Inc. (FB - Free Report) and Twitter, Inc. (TWTR - Free Report) have become a key platform for sales of luxury goods. Per Nielsen, 97% of the millennials own a laptop, while 96% have a smartphone. Understandably, increasing online spend by millennials has been spurring growth in the market.

Is Trade War a Cause for Concern?

Given that China is one of the biggest markets for luxury goods, trade disputes that the United States has with China and the EU have been making investors jittery. However, doubts remain if trade war will actually take a toll on luxury goods and shrink their customer base.

Luxury goods are still unfazed by tariffs unlike automobiles and industrial companies. Moreover, it is quite likely that status-conscious consumers won’t mind shelling out a few extra bucks on luxury goods, as that might add value to their purchases.

Also, a proof of the thriving luxury goods market despite trade war fears is the robust performance of the brands. LVMH Moët Hennessy Louis Vuitton S.E. (LVMUY - Free Report) reported an increase of 10% in sales in second-quarter fiscal 2018. Shares of LVMH have increased 19.5% year to date.

Shares of Tiffany & Co. (TIF - Free Report) and Michael Kors Holdings Limited (KORS - Free Report) jumped 28.1% and 13.4%, respectively, over the same time period. Luxury watchmaker Movado Group Inc. (MOV - Free Report) and fashion accessories-maker Fossil Group, Inc. (FOSL - Free Report) have surged 56.9% and 187.5%, respectively, on a year-to-date basis. Tiffany & Co carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Summing Up

Trade war fears may have made investors jittery but luxury goods seem to be relatively safer than the other industries, which are already feeling the heat of tariffs. Moreover, sales of luxury goods have been growing and much like 2017, this year too appears impressive.

Moreover, optimism surrounding strong economic growth, lower tax rates, higher consumer confidence, robust wage growth, and a 19-year-low unemployment rate hint at thriving market for luxury goods.

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