Luxury Goods as an Investment: LVMH, Hermès and the Power of Pricing

A Hermès Birkin bag has a base price of 10,000 euros — and on the secondary market it sells for double. The company raises prices every year, waiting lists stretch for years, yet demand does not fall. That is the luxury business in its purest form: a brand for which price has ceased to function as a deterrent. Investors recognised this and the luxury sector produced returns over the past decade that outpaced many market segments. But then came China — and with it a reminder that even Hermès is not immune to geopolitics.

What forms the luxury sector and who controls it

The term luxury sector conceals a more varied group than it first appears. Three core categories differ in risk profile and customer dynamics:

• Personal luxury — fashion houses, handbags, jewellery, watches. LVMH, Hermès, Richemont (Cartier, IWC, Vacheron Constantin), Kering (Gucci, Saint Laurent, Bottega Veneta).
• Premium automobiles — Ferrari trades with the valuation of a luxury company, not a carmaker. Porsche and Lamborghini (owned by Volkswagen) are a less straightforward route. Ferrari is a specific case: deliberately limited production keeps prices elevated and waiting lists span decades.
• Luxury experiences and hospitality — segments like luxury hotel chains or premium cruise lines have a different economics and some indices exclude them from the pure personal luxury category.

LVMH is the world's largest luxury conglomerate. It owns over 75 brands — Louis Vuitton, Dior, Moët, Hennessy, Bulgari, Sephora, Loro Piana and dozens of others. Revenues exceed 80 billion euros and the company employs over 200,000 people. LVMH is effectively the barometer of the entire sector: when it reports, the whole luxury market listens intently.

Pricing power: the key advantage that sets luxury apart

Luxury companies have one property every analyst would pay for: the ability to raise prices without losing customers. Hermès has raised prices by 5–10% annually in recent years. Louis Vuitton implemented several rounds of price increases during the Covid era — the iconic Speedy handbag rose in price by more than 30% between 2019 and 2022. And yet revenues grew.

Why? Because luxury goods are not a function. They are a signal. The customer is not buying a bag for 8,000 euros for its practicality. They are buying an identity, status, membership of a group. A higher price — up to a point — reinforces this function rather than weakening it. Economists call this a Veblen good: demand rises with price, not falls. Luxury companies live this every day.

Hermès is an extreme case: the company deliberately limits production and refuses to sell a Birkin to customers without a prior purchase history at their boutique. This artificial scarcity keeps secondary market prices above primary — the Birkin is investmentally considered to have a better reputation than many stocks. On the exchange, Hermès trades at a P/E significantly above the sector and the broad market.

Chinese demand: engine and vulnerability

The luxury sector is more dependent on the Chinese customer than many realise. Chinese demand typically accounts for 25–35% of global revenues at leading luxury houses — whether buying directly in China, in Europe during trips to Paris or Milan, or through daigou agents. This engine drove the sector to exceptional results in the 2010–2020 decade.

Then several turbulences hit at once. China's anti-corruption drive under President Xi reduced the purchase of luxury goods as gifts for government officials — a segment representing non-negligible sales volume. Covid isolation stopped the key tourist spending — Chinese tourists in Paris or Tokyo were buying luxury at a significant discount to domestic prices. And then came a slower Chinese economic recovery than markets expected.

LVMH, Kering and Richemont all felt a slowdown in Chinese revenues. Kering was hit hardest — Gucci was experiencing a difficult period also for design reasons. Sector shares corrected 30–40% from their peaks. For the investor this creates a specific geopolitical risk: exposure to the Chinese consumer depends on the political environment in China, the value of the renminbi, EU-China relations and Chinese GDP dynamics. None of these can be reliably predicted.

ETF route: GLUX and alternatives for the European investor

For the European investor there is a relatively straightforward route through UCITS ETFs. Amundi S&P Global Luxury UCITS ETF (ticker GLUX on Xetra or Euronext) tracks the S&P Global Luxury index, which includes approximately 80 leading luxury companies from around the world. The fund is domiciled in Ireland, available in an accumulating variant and TER is around 0.25–0.35%.

The fund composition includes alongside the European giants (LVMH, Hermès, Richemont) also Ferrari, premium carmakers and Asian luxury companies. The top three positions typically account for 20–25% of the fund — more diversified than a direct purchase of a single company, but still concentrated compared with a broad-market ETF.

The cyclicality that surprises: luxury in recession

Luxury is labelled more defensive than consumer cyclicals — and this is true to some extent. Ultra-high-net-worth individuals (UHNWI) cut luxury spending less than the middle class, because their spending is not constrained by income but rather by tastes and preferences. But the aspirational middle class — the segment driving enormous sales volume through entry-level products in cosmetics, fragrances and leathergoods — holds back in a recession.

Result: luxury companies are not immune to recessions. They are more resilient, but they do fall. In 2008–2009, luxury shares fell 50–60%. They then bounced back quickly and significantly outperformed the market in the subsequent decade. For an investor with a long horizon, this is an acceptable price for exposure to pricing power — but it is psychologically easier to bear if you are aware of it in advance and set your allocation so that a 40% decline does not destroy your plans.

If you want luxury as part of a diversified portfolio, it makes sense as a satellite position of 5–10% alongside a broad-market core. As a replacement for the broad-market core it is insufficient — the sector is too narrow and too Chinese-dependent to carry the full weight of a portfolio. This is not investment advice; the index is the starting point.