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MacroResearch Board
I n d e p e n d e n t I n v e s t m e n t S t r a t e g y
partnersmrbJanuary 7, 2014
THEMES
M R B PA R T N E R S I N C . m w w w . m r b p a r t n e r s . c o m m C o p y r i g h t 2 0 1 4 © ( s e e f i n a l p a g e f o r f u l l c o p y r i g h t ) 1
Next Report Strategic Trader & TradeTalk Thursday, January 9
Global Luxury (Part I): Inflating A BubbleThe rapid increase in the amount of concentrated
wealth in recent years has created a seemingly
insatiable demand for global luxury goods/services/
assets. The foundations for this theme were laid
in the early-1980s with the Reagan-Thatcher
revolution, which led to greater prosperity and
gradually shifted power from labor to capital
owners. Increased globalization and the emerging
market (EM) boom over the past decade amplified
these trends, while the Great Recession reinforced
(rather than derailed) the global luxury theme.
In turn, the price of luxury items has surged in
recent years relative to competing assets and are
now at unprecedented levels (chart 1). Thus, it is
appropriate to assess whether the global luxury
theme has become fully priced and vulnerable to a
shift in underlying fundamentals, or whether it still
has further to run.
This is the first of a two-part MRB Themes Report on global luxury. This report highlights
the dramatic surge in prices of both the listed and unlisted global luxury sector and
provides a sense of valuations. We conclude that there has been an alarming bidding
frenzy for many luxury items over the past few years, which is eerily reminiscent of the
late stage of past manias. Part II of this MRB Themes Report (which will be released
on January 14) will examine how underlying fundamentals could sour and looks at
catalysts that could trigger a major setback in global luxury. We also outline the
potential knock-on effects and broader fallout if a bear market develops in this sector.
Finally, we provide investment recommendations.
m There is a strong case that the global luxury complex is
in a full-fledged mania and late in the parabolic upleg.
Investors should avoid the urge to chase this theme
further and consider reducing exposure.
m The Reagan-Thatcher revolution started a prolonged
period of economic prosperity and greater income
inequality, building the foundations for global luxury
to thrive.
m Luxury demand was amplified by the industrialization
of emerging Asia and the corresponding commodity
boom.
m The strong profit and financial market recovery since
the Great Recession has reinforced the global luxury
theme. Also, low interest rates and use of unorthodox
policies have attracted capital into alternative assets,
boosting the price of luxury items.
m Although the global luxury theme has many
compelling attributes, the surge in demand and
dramatic upleg in prices has made many of these
asset plays vulnerable to even a minor deterioration
in underlying fundamentals.
There has been a bidding frenzy for many luxury items
2M R B PA R T N E R S I N C . m w w w . m r b p a r t n e r s . c o m m C o p y r i g h t 2 0 1 4 © ( s e e f i n a l p a g e f o r f u l l c o p y r i g h t )
mrb THEMES m January 7, 2014
Chart 1 Comparison Of 10-Year Total Returns (%)
0
200
400
MRB Partners Inc © 01/2014
Bloomberg Global Luxury Stock
Index**
The Economist Valuables
Index
MSCI Global
Equities
CRB Futures
Global Corporate Master***
G7 Government
Bonds* Textiles, Apparel and Global Luxury Goods equity subsector** Price gain since August 2005*** Source: BofA Merrill Lynch
Inequality And Unprecedented Wealth Creation: Fertile Ground For Global Luxury
The Reagan-Thatcher Revolution Formed The Foundations
Unionization flourished in Western societies (including the U.K. and the U.S.) throughout
much of the 1900s. This provided labor with significant bargaining power and caused wealth
gains to be more evenly distributed in these economies. However, trade unionism also
eventually acted as a drag on overall prosperity and led to increased economic volatility
by the 1970s. Limited labor flexibility and the inability of real wages to adjust downward
extended recessions throughout this period and undermined both corporate profitability
and the economic expansions during recovery phases. Mass labor strikes also curtailed
productivity and efficiencies, while indexation of wages contributed to a self-reinforcing
uptrend in inflation by the 1970s. The latter created increased uncertainty, drove up interest
rates, and ultimately weakened the underlying fundamentals supporting these economies.
The pressure finally came to a head in the U.K. during the second half of the 1970s.
The country had to ask the IMF for a bailout and in late-1978/early-1979 a significant
portion of the nation’s public sector workers went on strike during the “Winter of
Discontent”. Political support rapidly shifted away from the Labour party and towards
the Conservatives, with Margaret Thatcher winning the general election in May 1979.
Likewise, popular support rotated within the U.S. in favor of the Republicans, allowing
Ronald Reagan to take the Presidency in January 1981.
The Reagan-Thatcher revolution began by the early-1980s and resulted in deregulation, a
"war" against labor unions (union membership in both countries has been cut roughly in
half since peaking around 1980) and a trend towards lower taxation rates. Other nations
followed to varying degrees. This contributed to an extended period of structural global
disinflation and economic prosperity. However, it also shifted power and wealth gains
MSCI Global Luxury*
Global luxury has materially outpaced other competing assets over the past decade
The early-1980s started the shift towards greater inequality, lower taxation and disinflation... ...fertile ground for global luxury
3M R B PA R T N E R S I N C . m w w w . m r b p a r t n e r s . c o m m C o p y r i g h t 2 0 1 4 © ( s e e f i n a l p a g e f o r f u l l c o p y r i g h t )
mrb THEMES m January 7, 2014
Chart 2 Prolonged Trend Towards Greater Income Inequality
1985 1990 1995 2000 2005 2010
0.29
0.30
0.31
OECD Gini Coefficient*
* Source: OECD
MRB Partners Inc © 01/2014
The wealthy have captured a greater share of economic prosperity
away from wage earners and back to capital owners,
triggering the start of what would be a prolonged trend
towards greater income inequality1 (chart 2). Indeed,
profits and incomes of capital/business owners and
senior executives have powered forward over the past
three decades, even as laborers in many countries have
seen only minimal real income growth despite higher
productivity (chart 3).
In short, the early-1980s marked the beginning of a
structural shift in the distribution of income towards
greater inequality. Changes in policies and other macro
factors allowed the wealth creation to be absorbed by a
smaller segment of the global population. This provided
fertile ground for a sustained rise in the demand for
luxury goods and services.
Emerging Asia Industrialization Amplified The Trend
The industrialization of emerging Asia (and other manufacturing-based EM economies,
including Mexico) since the early 2000s amplified many of the trends started by Reagan
and Thatcher. Lower labor costs, rapid productivity gains, and free trade agreements
(including the formation of NAFTA in 1994 and the WTO in 1995, which China became
a member of in 2001), enabled emerging markets to become major providers of 1 The Gini coefficient is a commonly used measure of income equality, which ranges from 0 to 1. Zero
implies that everyone has the same income, while 1 implies that a single individual earns all the income of the economy. It is named after the Italian statistician, Corrado Gini, who first created it in 1912.
Chart 3 Global Capital Owners Have Thrived
20
25
Global:Exports* (% of GDP)
200
400Real Profits**
70
90
Real Unit Labor Costs***
5
10
1980 1985 1990 1995 2000 2005 2010
Core CPI Inflation**** (%YoY)
* Source: OECD** Deflated by core CPI; rebased to January 1980 = 100; source: Datastream*** Deflated by core CPI; rebased to January 1980 = 100; source: OECD**** Excluding food and energy; source: OECD
MRB Partners Inc © 01/2014
A shift in government policies and rapid globalization...
...has allowed shareholders and executives to gain...
...at the expense of labor...
...and has created a disinflationary backdrop
4M R B PA R T N E R S I N C . m w w w . m r b p a r t n e r s . c o m m C o p y r i g h t 2 0 1 4 © ( s e e f i n a l p a g e f o r f u l l c o p y r i g h t )
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Chart 4 The Pool Of Extreme Wealth Has Grown
2000 2002 2004 2006 2008 2010 2012 2014
Number Of Individuals (LS)Aggregate Net Worth (US$ tn, RS)
600 –
1000 –
1400 –
1–
3–
5–
Global Billionaires*:
* Source: Forbes
MRB Partners Inc © 01/2014
The number of wealthy people and their net worth has mushroomed
manufactured goods. In turn, globalization surged (as
measured by global exports/GDP) and reinforced the
disinflationary tailwind by putting downward pressure
on tradable goods and services prices (chart 3). Also,
increased global competition and the ability to offshore
production acted as a drag on OECD manufacturing
sector wages and further drove down unit labor costs
across the globe. These forces led to greater aggregate
economic prosperity and lower interest rates.
At the same time, the industrialization of emerging Asia
led to a dramatic increase in global commodity demand,
fueling growth in natural resource-based economies
(many of which are also in the emerging world). Unlike
during the OPEC embargo of the 1970s, higher commodity
prices were primarily driven by stronger demand and not
by reduced supply. In turn, while there has been some crowding out, commodity prices
are a reflection of greater productivity, increased efficiencies and stronger global growth
(rather than act to strangle the latter). Thus, commodity exporters have benefited over
the past decade from both higher export prices and output volumes, increasing their
overall wealth and creating positive multiplier effects within their economies.
Importantly, the windfall experienced in the emerging world have contributed to sizable
global economic gains, rather than merely transferred wealth away from the developed
world. Net gains are typical during industrialization phases, due to the dramatic boost in
productivity. The emerging world has unquestionably obtained a greater proportion of
global growth, but the developed economies also expanded at a healthy clip (at least up
until the Great Recession). Disinflation and lower interest rates fueled housing/financial
wealth gains and a consumption boom. While many advanced nations overreached and
are now forced to work through their imbalances, the number of ultra-wealthy people
and the total assets they hold has mushroomed since the 2000s (chart 4).
The maps on the following page emphasize the wealth creation over the past decade.
The circles that represent the countries in both maps are proportionate to the total net
worth of billionaires in 2013. Clearly, this segment of the population has become much
wealthier across the whole world over the past 10 years. Also, there has been a dramatic
increase in the percentage of wealth that is now located in emerging markets (which
we colored in green for convenience). Statistics for each country are provided in the
appendix table A1 on page 17.
In short, emerging Asian industrialization has been critical in driving the demand for luxury
goods and services, by broadening the market beyond just the advanced economies. The
Emerging Asian industrialization and the corresponding commodity boom have created tremendous wealth... ...broadening the market for luxury beyond the advanced economies
5M R B PA R T N E R S I N C . m w w w . m r b p a r t n e r s . c o m m C o p y r i g h t 2 0 1 4 © ( s e e f i n a l p a g e f o r f u l l c o p y r i g h t )
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2003
2013
Canada
U.S.
Mexico
Venezuela
Colombia
Brazil
ArgentinaChile
IrelandU.K.
Netherlands
Belgium
France
SpainPortugal
Switzerland
Austria
Germany
SwedenNorwayDenmark Russia
Turkey
ItalyGreece
IsraelLebanon
MalaysiaU.A.E.
Kuwait
India
Thailand
Saudi Arabia
Philippines
Indonesia
Singapore
Australia
South Africa
Taiwan
Hong Kong
Japan
South Korea
Canada
U.S.
Mexico
Venezuela
Colombia
Brazil
ArgentinaChile
Peru
Belize
St. Kitts And Nevis
South Africa
SwazilandAngola
Nigeria
Morocco
Egypt
Australia
New Zealand
Greece
IsraelLebanon
U.A.E.
Kuwait
Saudi Arabia
CyprusItaly
SwitzerlandMonaco
SpainPortugal
France
Guernsey
IrelandU.K.
Germany
Hong Kong
Japan
South KoreaChina
Russia
Taiwan
Philippines
Vietnam
Thailand
Singapore
Indonesia
Nepal
Malaysia
Kazakhstan
Georgia
AustriaRomania
Poland
FinlandSweden
Turkey
India
NetherlandsDenmark
Norway
Czech Republic
BelgiumUkraine
Maps Change In Billionaire Wealth Over Past Decade
Note: Circles are proportionate to the total net worth of billionaires in 2013; for details see table A1 on p.17; source: Forbes
Advanced EconomiesEmerging Economies
MRB Partners Inc © 01/2014
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Chart 5 U.S.: Sub-Par Recovery, But Above-Par Profits
April 2008Average Of Past 8 Cycles(all panels)
100
120
U.S.: Real GDP
100
150
200Corporate Profits*
2000 2002 2004 2006 2008 2010 2012 2014
100
150
S&P 500
* Before tax; inventory valuation and capital consumption adjustedNote: Series aligned with the troughs in profits as denoted by the vertical line
MRB Partners Inc © 01/2014
The economic recovery has trailed past cycles...
...but corporate profits and the stock market have rebounded faster
windfall gains in emerging markets over the past 10-15
years have also been realized by a relatively small portion of
the population (similarly to the experience in the developed
world). This has provided a new and rapidly expanding pool
of highly affluent individuals that appear to have had an
unquenchable demand for luxury items2. Moreover, high
net worth individuals in many of these countries are eager
to store their wealth in historically more stable advanced
economies, thereby benefiting luxury properties and assets
in a broader range of markets across the globe.
The Great Recession Reinforced The Theme
The economic and profit fallout during the Great
Recession was dramatic. However, the dynamics
during the recovery phase have served to reinforce the
pre-existing patterns of income and wealth inequality,
supporting the global luxury theme. Specifically, the
economic expansion in the U.S. and other developed
economies since the beginning of 2009 has been
historically subdued (as expected) given the material
deleveraging headwinds (chart 5). Still, corporate profits
have significantly outperformed the average of past
recovery phases, benefiting capital owners and senior
management. This has also triggered a strong bull market
in global equity prices, while the disinflationary tailwind
has kept bond yields low (at least until recently). In turn,
high net worth individuals have disproportionately benefited from financial asset gains.
In contrast, labor has not participated equitably from the economic gains. U.S. and G7
unemployment rates surged during the Great Recession to levels well above equilibrium
and have been slow to decline, as job creation has trailed historical norms (chart 6). This
has removed the bargaining power of labor and allowed companies to maintain wide profit
margins. Chart 7 from the December 3 MRB Theme Report3 shows the key components of
profit margins for the U.S. nonfinancial sector: unit labor costs, unit non-labor costs and
selling prices. Profits relative to GDP have exceeded previous cycles, even though selling
prices have been far weaker than in the past. The reason is that companies have had
remarkable success in driving down labor and non-labor costs per unit of output. While these
charts use the U.S. as an example, the same phenomena can be observed across the globe.2 The tendency for “elites” in emerging economies to replicate the consumption patterns of their peers in
the developed world is well documented in economic development literature.3 MRB Theme Report, "U.S. Profit Margins: Still Too Soon To Worry", December 3, 2013
The recovery since the Great Recession has reinforced the pre-existing patterns of income and wealth inequality
7M R B PA R T N E R S I N C . m w w w . m r b p a r t n e r s . c o m m C o p y r i g h t 2 0 1 4 © ( s e e f i n a l p a g e f o r f u l l c o p y r i g h t )
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Chart 6 U.S. Job Market Recovery Has Been Much Slower This Cycle
June 2009Average Of Past 8 Cycles(all panels)
100
108
U.S.:Employment*
2006 2008 2010 2012 2014
6
8
Unemployment Rate** (%)
* Total nonfarm payrolls; source: U.S. Bureau of Labor Statistics** Source: U.S. Bureau of Labor StatisticsNote: Panel 1 rebased to 100 at NBER-designated U.S. recession troughsas denoted by the vertical line
MRB Partners Inc © 01/2014
Chart 7 U.S.: Selling Prices And Input Costs Have Been Weaker Than The Norm
80
120
160
Current CycleAverage Of Past 8 Cycles**(all panels)
U.S. Nonfinancial Sector*:Per Unit Profit
80
100
Unit Price
80
100
Unit Labor Cost
2002 2004 2006 2008 2010 2012 2014
80
100
Unit Non-Labor Cost
* Rebased to Q2 2009 = 100; source: U.S. Bureau of Economic Analysis** Average boom/bust cycle aligned with the troughs of per unit profits as denoted by the vertical line
MRB Partners Inc © 01/2014
Profits have outpaced...
...despite weak selling prices...
...because input costs have been suppressed
In short, businesses slashed costs during the downturn
and have successfully defended their profit margins
during the recovery. Correspondingly, capital owners and
senior executives have been able to capture a greater
percentage of economic growth in recent years, at the
expense of the average household. In this regard, the
Great Recession has supported (rather than destroyed)
the demand for luxury.
It is also worth noting that commodity prices recovered
rapidly, despite the subdued economic recovery.
However, this was not due to demand outstripping
supply. Rather quantitative easing, currency debasement fears and U.S. dollar
weakness explains much of the sharp recovery4 (chart 8). Nonetheless, commodity
price strength preserved the wealth gains in natural resource-based economies.
Finally, forceful monetary easing and the collapse in real interest rates have provided a
substantial tailwind for luxury. The uncertainty associated with the use of unorthodox
4 MRB Theme Reports, "End Of The Commodity Boom (Part I)", September 25, 2012 and "End Of The Commodity Boom (Part II)", October 2, 2012
Low real rates and unorthodox policies supported the demand for global luxury
8M R B PA R T N E R S I N C . m w w w . m r b p a r t n e r s . c o m m C o p y r i g h t 2 0 1 4 © ( s e e f i n a l p a g e f o r f u l l c o p y r i g h t )
mrb THEMES m January 7, 2014
Chart 8 Commodities Have Been Propped Up By Excess Liquidity, Not Demand/Supply
1998 2000 2002 2004 2006 2008 2010 2012 2014
Investment/PolicyComponent**FundamentalComponent***
200
400
600
Economically-SensitiveCommodity Prices*:
* Equally-weighted aggregate of brent oil & copper; rebased to January 1998 = 100** Captures impact of liquidity and currency; derived from CRB precious metals index*** Captures economic growth and final demand versus supply
MRB Partners Inc © 01/2014
Chart 9 Zero-Yielding Assets Need Low/Falling Real Rates
100
400
1600Gold Price ($/oz)
0
5
1970 1975 1980 1985 1990 1995 2000 2005 2010
Real U.S. 5-Year Government Bond Yield* (%)
* Deflated by headline CPI inflation
MRB Partners Inc © 01/2014
monetary policies in recent years and fears of currency
debasement encouraged many investors to purchase hard
currency assets. Many luxury items, along with gold, fit
this requirement. Also, most luxury items that are held for
alternative investment purposes are zero-yielding assets
and (in many cases) even cost investors to upkeep or store.
Therefore, the inflation-adjusted rate of interest that
investors receive for lending their capital is the opportunity
cost of holding these assets (chart 9). The collapse in real
bond yields in recent years (into negative territory in the
major countries) increased the appeal of global luxury.
Likewise, lower real interest rates diminished the incentive
to save, helping boost the demand for luxury consumption
goods and services. Real bond yields are now rising, albeit
remain historically subdued.
Final Word: The Reagan-Thatcher revolution started a
shift towards greater income inequality. This concentration
in global wealth among a small segment of the overall
population increased the demand for luxury goods and
services. Industrialization of emerging Asia and the
corresponding commodity boom amplified these trends by
broadening the number of ultra-wealthy households.
Finally, while the Great Recession posed an initial threat
to the luxury boom, the recovery phase over the past few
years has only reinforced it. High unemployment has
accelerated inequality, by allowing capital owners and
senior management to suppress real wages and capture
a greater proportion of economic growth. Also, unease
about global monetary policies have increased the demand
for hard currency alternative assets and the suppression
in real interest rates have muted the opportunity cost for
holding zero-yielding luxury items as an investment. Low
interest rates have also diminished the incentive to save,
benefiting global luxury consumption.
Global Luxury: Becoming Overly Rich
The dramatic increase in both the total number and affluence of high net worth individuals
has created a global “cult of luxury”. While demand for luxury goods and services is
9M R B PA R T N E R S I N C . m w w w . m r b p a r t n e r s . c o m m C o p y r i g h t 2 0 1 4 © ( s e e f i n a l p a g e f o r f u l l c o p y r i g h t )
mrb THEMES m January 7, 2014
Chart 10 Prices Of Unlisted Luxury Assets Has Surged
2003 2004 2006 2008 2010 2012
200
300The Economist Valuables Index*
* Rebased to January 2003 = 100
MRB Partners Inc © 01/2014
highly correlated with affluence, arguably the trend has
been accentuated by the amount of “new money” that
has been created. Generational wealth typically already
has or inherits many luxury items, but new money needs
to build their lifestyles from scratch. Also, many use
luxury items as “positional goods” to identify their newly
established “place” in society5.
Media programs about the lifestyles of the rich and
famous (which were novel a few years ago) have now
become commonplace. Also, articles of luxury have
become so popular (including the FT’s “How To Spend
It”) that Bloomberg recently added a new section
devoted to the subject. These are often contrarian
warnings that a long-term structural theme has become
overdone or is nearing an end. Thus, it is appropriate to stand back and assess whether
the luxury theme has moved ahead of the improvement in underlying fundamentals.
Unfortunately, many of these items lack historical price series. Nonetheless, we have
compiled a few examples to analyze from both the unlisted and listed sectors.
Unlisted Sector
m Valuables Index: The Economist magazine publishes a Valuables Index, which includes
art, classic cars, coins, guitars, stamps, violins and wine (chart 10). The aggregate index
has more than tripled over the past decade. After rising dramatically from 2003-2008,
the Valuables Index then corrected briefly, before surging to new extremes and still
continues to move higher.
m Super Cars: Classic automobiles have been the strongest component of The Economist
Valuables Index, with prices jumping more than 6 times over the past decade. In fact,
the Historic Automobile Group International (HAGI) Top Price Index of rare collector
automobiles jumped 47% in 2013 alone6. Articles about new all-time highs in prices at
vintage car auctions seem to be a regular occurrence. For example, a 1963 Ferrari 250
GTO racer smashed all previous records last year, selling for a whopping $52 million.
While obviously an extreme, there is a large and increasing number of cars selling at
auctions for seven and eight figure price tags.
There is also no shortage of stories about new super cars that try to outdo each other on
top speed, acceleration, comfort and/or customizability. Those cars, plus the luxury 5 A positional good (a term coined by Fred Hirsch in 1976) is a product or service whose value is at least
in part (if not exclusively) a function of its ranking in desirability by others. The extent to which a good's value depends on such a ranking is referred to as its positionality.
6 HAGI Top Price Index is designed to measure rare collector automobiles, ranging from pre-war to the new millennium.
The price of global luxury items has gapped higher... ...as the rich get richer and "new money" attempts to build their lifestyles
10M R B PA R T N E R S I N C . m w w w . m r b p a r t n e r s . c o m m C o p y r i g h t 2 0 1 4 © ( s e e f i n a l p a g e f o r f u l l c o p y r i g h t )
mrb THEMES m January 7, 2014
Chart 12 Fine Art And Wine Prices Remain At Extreme Levels
200
400
Fine Wine Prices*
2000 2002 2004 2006 2008 2010 2012
120
180
Global Art Prices**
* U.S. dollars; rebased to January 2000 = 100; source: Liv-ex Fine Wine 50 Index** U.S. dollars; rebased to January 2000 = 100; source: Artprice.com
MRB Partners Inc © 01/2014
Chart 11 Strong Demand For Luxury Cars Has Led To A Surge In Concept Introductions
0
10
20
30
40
2006 2007 2008 2009 2010 2011 2012 2013
Number Of Concept Car Introductions At The Geneva Motor Show
MRB Partners Inc © 01/2014
models of the future, are often initially released as
concept cars to generate media buzz and stoke the
interest of potential customers. An increase in the
number of concept car releases is, at least in part,
reflective of the burgeoning luxury and super car
industry that caters to the wealthy. Using data from the
Geneva Motor Show, we have compiled the number of
such concept launches in each of the past eight years
(chart 11). The results clearly show the dampening impact
of the crisis and then the enormous rebound which now
leaves concept introductions far above pre-crisis levels.
An indication of the widespread nature of the rush to
supply the super car market is the huge number of new
manufacturers present in the space and from a very wide
range of countries (i.e. no longer just Italy).
m Fine Wine And Art: The exclusive ends of these two
alternative asset classes have seen dramatic price
increases (chart 12). The Liv-ex Fine Wine 50 has risen
roughly 250% in the past decade. Fine wine prices
corrected 40% in 2008, but then jumped 135% to their
2011 peak. Since then, prices have fallen 30%, although
they remain at frothy levels. As for fine art, prices
doubled from 2003-2008, before correcting sharply.
Prices then surged back to modest new highs in 2011
before pulling back. Over the past 12-18 months fine
art prices have been grinding higher, albeit still remain
slightly below their previous peak. That said, prices at
the extreme end of this market continue to push to
new highs, including 2013 sales of a Picasso for US$155
million, a Bacon for US$142 million, a Newman for
US$106 million and a Warhol for US$105 million. The
value of total global art sales is also near the 2008 peak,
highlighting still strong turnover volumes.
m Freeports: An article from The Economist in
November7 highlighted that there has been a mushrooming in tax-haven storage
facilities outside major airports (called “freeports”). The ultra-rich pay the freeports
to warehouse their art, fine wine, jewelry, precious metals, tapestries, classic
7 The Economist, "Uber-warehouses for the ultra-rich", November 23, 2013
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mrb THEMES m January 7, 2014
Chart 13 Prime Global Property Prices Have Moved Parabolic
Prime London**LondonEngland And Wales
100
140
180
House Prices*:
2002 2004 2006 2008 2010 2012 2014
Residential*** (LS)Commercial**** (RS)
100 –
200 –
300 –
200–
400–
Hong Kong Property Prices:
* Rebased to January 2004 = 100; source: U.K. Land Registry** Average of four most expensive boroughs in London*** Hong Kong Island only; 3-month moving average; rebased to January 2004 = 100; source: Rating and Valuation Department, Hong Kong**** Rebased to January 2004 = 100; source: Central Statistics Department, Hong Kong
MRB Partners Inc © 01/2014
automobiles, etc. The Swiss were the first to pioneer
these giant treasure chests and now have half a dozen,
with Geneva alone storing goods in two sites with floor
space equivalent to 22 soccer fields. Other countries,
including Luxembourg, Singapore, Monaco and soon
Beijing are also competing in this industry, by building
massive, ultra-luxurious and highly fortified facilities.
m Luxury Travel: Anecdotal evidence from our extensive
travels across the globe is that the price of four and five
star hotel rooms has more than doubled in the major
cities in recent years, while overall hotel price inflation
has been fairly modest. Likewise, the gap between
business and first class versus economy airfare tickets
has dramatically widened, albeit this may in part be
due to airline industry consolidation.
m Prime Global Property: High-end real estate in the
major cities has surged over the past 20 years and is
still pushing to new highs. Probably the most extreme
examples of this are London, Hong Kong and New
York, given that these markets are highly desired by
wealthy global households (i.e. not just locals). Specifically, property in England and
Wales has increased by 36% over the past decade (albeit prices are still below their
pre-crisis peaks), while house prices in London have jumped nearly 60% and are at
new highs (chart 13). Prices in the most expensive boroughs in London have surged
120% during this period and continue to hit new extremes.
Likewise, since the 2003 low, Hong Kong residential and commercial property prices
have jumped more than 3 times and 6 times, respectively. New York also has some of
the most expensive residential property on the planet. Manhattan has experienced
the fastest price appreciation, but it is within the borough that the greatest divergence
has occurred; the ultra premium properties now trade at multiples of the values they
could command only a few years ago. Indeed, it is no longer a rare phenomenon to see
homes in these three cities commanding prices well into the eight or even nine figures.
There has also been a similar surge in prices at the exclusive end of these commercial
real estate markets, especially for buildings with internationally recognized addresses.
Although Hong Kong, London, and New York provide clear examples of global wealth
moving into residential property, the widening inequality gap has been evident in real
estate trends in many parts of the globe. Specifically, residential property prices within
Luxury property prices have dramatically outpaced average homes in global cities... ...and in economic capitals of many countries
12M R B PA R T N E R S I N C . m w w w . m r b p a r t n e r s . c o m m C o p y r i g h t 2 0 1 4 © ( s e e f i n a l p a g e f o r f u l l c o p y r i g h t )
mrb THEMES m January 7, 2014
Chart 14 Global Luxury Stocks Have Dramatically Outperformed In Recent Years
100
150
200
Textiles, Apparel and Luxury GoodsConsumer DiscretionaryBenchmark
Global Stock Prices*:MSCI:
LuxuryConsumer DiscretionaryBenchmark
80
130
180
S&P:
2006 2008 2010 2012 2014
100
300
Bloomberg Global Luxury Index*
* U.S. Dollars; rebased to January 2006 = 100; sources: Bloomberg, MSCI and S&P
MRB Partners Inc © 01/2014
the economic capital of most nations is pulling further
away from prices elsewhere. This is especially true
since the Great Recession and for the exclusive end
of the property market. It is also creating challenges
for many central banks, which would now like to limit
housing/credit excesses in the major cities, but are
fearful of tightening and crushing property markets
in the countryside. Some countries have considered
tightening credit standards for mortgages of homes
in major cities, while the U.K. Help-To-Buy program
provides support primarily to non-luxury homes.
m Sports Memorabilia And Team Ownership: Anecdotal
evidence suggests that the bull market in sports
memorabilia has also intensified in recent years,
with prices surging for a wide range of collectables.
However, even more dramatic is the globalization of
team ownership. The ultimate of positional goods
or status symbols among billionaires in recent years
has become to acquire a prestigious sports franchise.
Prices of teams have gapped higher and in many cases
new owners have stacked the bench with star players
and without much consideration of generating a profit.
Listed Equity Sector
Although not a pure play on luxury, the MSCI Textiles,
Apparel and Luxury Goods equity subsector has
vastly outpaced both the global broad market and the
consumer discretionary sector over the past several years (chart 14). The most dramatic
outperformance has been since 2009, with the subsector surging nearly 300% (i.e. about
2.4 times as much as the broad market).
To get a more focused view of the performance of global luxury stocks, we reviewed a
couple other indexes that are constructed from firms in the industry. The first is the S&P
Global Luxury Index which is composed of the 80 largest publically traded companies
that “engage in the production and distribution of luxury goods and services”. This index
has surged over 330% since its 2009 lows. In addition we reviewed the Bloomberg Global
Luxury Competitive Peers and the Bloomberg Global Luxury Valuation Peers indexes.
The Competitive Peers Index includes equally-weighted stocks of 36 global luxury goods
and services firms, while the Valuation Peers Index is a subset of 25 stocks. These indexes
Global luxury stocks have massively outperformed
13M R B PA R T N E R S I N C . m w w w . m r b p a r t n e r s . c o m m C o p y r i g h t 2 0 1 4 © ( s e e f i n a l p a g e f o r f u l l c o p y r i g h t )
mrb THEMES m January 7, 2014
Chart 15 Analysts Are Overly Optimistic On Sales And Profits Of Luxury Companies
Chart 16 Global Luxury Stocks Are Expensive Despite Optimistic Analyst Projections
Textiles, Apparel and Luxury GoodsConsumer DiscretionaryBenchmark(panels 1 and 2)
100
140
180
MSCI Global:
12-Month Forward Sales*
50
125
200
12-Month Forward Earnings*
2006 2008 2010 2012
12-Month Forward Sales12-Month Forward Earnings Per Share
100
300
500
Bloomberg Global Luxury Index**:
* Rebased to January 2006 = 100; source: MSCI** Rebased to January 2006 = 100; source: Bloomberg
Textiles, Apparel and Luxury GoodsConsumer DiscretionaryBenchmark(panels 1 and 2)
10
20
MSCI Global:12-Month Forward P/E Ratio*
2
3
12-Month ForwardPrice / Book Ratio*
10
20
30
1
2
3
2006 2008 2010 2012 2014
12-Month Forward P/E Ratio (LS)12-Month Forward Price / Book Ratio (RS)
Bloomberg Global Luxury Index**:
* Source: MSCI** Source: Bloomberg
MRB Partners Inc © 01/2014MRB Partners Inc © 01/2014
have rallied more than 500% from their 2009 lows. Indeed, a bidding frenzy has now
developed for these stocks8.
The dramatic price appreciation in these equity indexes is in part reflective of the powerful
increase in sales and profits of the underlying firms. However, market forecasts of future
revenues and earnings of luxury companies over the next couple of years extrapolate
the parabolic upleg (chart 15). This leaves substantial room for disappointment. Even
accounting for these overly optimistic projections, valuations have become rich, with
forward P/E ratios trading at a 27% premium to the broad market (chart 16). Price/book
ratios are even more stretched, with global luxury stocks currently trading at a 60%
premium over the broad market. Thus, anything that even slows the pace of increase 8 Moncler, the luxury skiwear maker, was the most successful European IPO of 2013, pushing the market
capitalization up nearly 50% to €3.7 billion after receiving €20 billion in orders.
Investors are overly upbeat on luxury firms and likely to be disappointed
14M R B PA R T N E R S I N C . m w w w . m r b p a r t n e r s . c o m m C o p y r i g h t 2 0 1 4 © ( s e e f i n a l p a g e f o r f u l l c o p y r i g h t )
mrb THEMES m January 7, 2014
Chart 17 Global Luxury And MRB Mania Profile
Phase 1
Phas
e 3
Phase 5
Phase 6
Phase 2
Phase 4
YearsPhase 1: Bull RunPhase 2: Pullback & Asymmetric BetaPhase 3: Parabolic UplegPhase 4: Correction & Failed Bounce Phase 5: CrashPhase 6: Revulsion
MRB Partners Inc © 01/2014
Stylized Mania
Global luxury is here
of global luxury goods and services consumption from
current levels (a trend that may have already started
in parts of the globe) could cause a major correction in
these stocks.
Final Word: There has been an insatiable demand
for global luxury goods and services as well as related
investments. While this theme has many compelling
attributes, the surge in demand and parabolic upleg in
prices is characteristic of a mania underway (see below).
Many of these items/assets are becoming increasingly
vulnerable to even a modest deterioration in underlying
fundamentals. Also, there is a strong likelihood that there
is hidden leverage on some luxury assets, including homes.
Global Luxury And The MRB Mania Profile
Financial asset bubbles are nothing new. There are
records of them dating back centuries. In the April 30 and
May 8 MRB Theme Reports9, we outlined the conditions required for a mania to develop
and highlighted that the world is indeed prone to inflating asset bubbles. Among the
ingredients needed are cheap money (of which there is no shortage) and a compelling
long-term structural theme that can capture the imagination of investors.
Our reports noted that themes do not develop overnight and turn into bubbles. In almost
all cases the appealing structural story has been in place for years (if not decades) before
speculative excesses begin to build. It is simply that investors receive confirmation
as the theme develops and gain more conviction (i.e. the story becomes “fact” and
seemingly “bulletproof”). Although the initial fundamentals behind most asset manias
are legitimate, the problem is that investors become too enthusiastic about the potential
gains and over-price the assets (i.e. they over-extrapolate the story).
In the case of global luxury, the positive long-term theme was kick-started with Reagan
and Thatcher (as noted above). However, it took industrialization of emerging Asia and
an increase in widespread demand from the aggregate emerging world to capture the
imaginations of investors.
Our research reports also outlined the six typical phases of a bubble, which we included
in the MRB Mania Profile (chart 17). Arguable, global luxury has now advanced to late-
Phase 3 (chart 18):
9 MRB Theme Reports, "Macro Themes & Manias (Part I)", April 30, 2013 and "Macro Themes & Manias (Part II)", May 8, 2013
Global luxury is in a full-fledged mania as... ...investors have already priced in the positive longer-term theme
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mrb THEMES m January 7, 2014
Chart 18 Global Luxury: Following The Pattern Of Previous Bubbles
200
300The Economist Valuables Index*
40
80
120
2002 2004 2006 2008 2010 2012 2014
Bloomberg Luxury IndexMSCI Textiles, Apparel and Luxury Goods
200–
400–
Global Stock Prices**:
* Rebased to January 2003 = 100** U.S. dollars; sources: Bloomberg and MSCINote: Phases of the MRB Mania Profile are shown in chart 17
MRB Partners Inc © 01/2014
Phase 1Phase 2
Phase 3
Phase 3
Phase 2
Phase 1
m Phase 1 (Bull-Run): Bubbles start as typical bull
markets, where the asset class experiences an orderly
period of price appreciation on the back of improving
fundamentals. This phase tends to last 6-8 years.
Global Luxury: This phase began in the early-2000s
when Chinese industrialization shifted into full force,
dramatically widening the market for these goods
and services.
m Phase 2 (Pullback & Asymmetric Beta): There is a
material pullback at some point in the bull-run, usually
in response to an economic/policy event and correction
in overall risk assets. However, the price correction is
typically muted by historical norms (for the asset in
question) and quickly bounces back to new highs when
compared with other risk assets. In turn, this results
in what seems to be a better reward/risk tradeoff: the
asset class in focus appears to be a higher than usual
beta on the upside and lower than usual beta on the
downside. In short, investors discover what we term as “asymmetric beta” properties.
Global Luxury: This phase occurred around the Great Recession, when global luxury
asset prices and profits of these stocks fell less and recovered faster than other assets
(including the overall equity market).
m Phase 3 (Parabolic Upleg): The pullback phase typically ends with policymakers
providing another shot of stimulus. This, combined with increased confidence in the
underlying theme and the sense that the asset class in focus is “less risky”, triggers
rapid price appreciation. Investors start to extrapolate and discount the positive
long-term outlook. On average, this parabolic upleg leads to a doubling in prices over
a 1-2 year period, before the bubble reaches a peak.
Global Luxury: The rally in global luxury items and asset prices has turned parabolic over
the past couple of years as companies and investors realized that the Great Recession
and the subdued global recovery reinforced (rather than derailed) this theme. Luxury has
been an area with a very vibrant recovery, despite the sluggish rebound in aggregate final
demand. That said, this phase is now extended (both in terms of duration and magnitude
of price increases) for many global luxury items/assets.
m Phase 4 (Correction & Failed Bounce): The first downleg following the parabolic upleg
or mania peak is usually policy induced and results in a substantial correction. Still,
Prices of many global luxury items/assets are late in their parabolic upleg... ..some have already peaked
16M R B PA R T N E R S I N C . m w w w . m r b p a r t n e r s . c o m m C o p y r i g h t 2 0 1 4 © ( s e e f i n a l p a g e f o r f u l l c o p y r i g h t )
mrb THEMES m January 7, 2014
investors remain convinced that the theme will once again remain intact and asset
prices will be driven to new extremes. Thus, they typically treat the correction as an
opportunity to add exposure. While persistent demand by a broad group of investors
helps lead to a bounce, extreme valuations and slowly deteriorating fundamentals
prevent asset prices from hitting new highs.
Phase 5 (Crash): Once the post-bubble bounce fails, realization begins to set in that
prices have dramatically overshot fundamentals (i.e. the positive structural story has
been fully discounted and negatives start to surface). The speculative frenzy ends
abruptly and investors rush for the exits, causing a crash in asset prices. The collapse
typically takes prices back to roughly the level where the parabolic upleg began (on
average a 50% plunge over a two year period).
Global Luxury: On balance, luxury-related items/assets have not yet reached Phase 4
and 5 (albeit select luxury assets may have already seen their ultimate peak). However,
Phase 4 is likely not far into the future for the overall luxury complex.
Final Word: There is a strong case that global luxury is in a full-fledged mania and late in the
parabolic upleg. We recognize that this statement is going to generate considerable criticism.
After all, the luxury theme currently seems “bulletproof”, which is the reason why many of
these items/assets have gapped higher in price. However, extremely high conviction is always
present near the peak of asset bubbles. In fact, it is usually not until after the first major setback
when prices fail to hit new highs that investors begin to worry about the outlook.
At a minimum, we recommend that investors resist chasing this theme. Although this phase of a
mania is potentially the most rewarding, it is also the most dangerous. Given the illiquidity and
inability to set stop-losses for many of these assets, investors will have to be more preemptive
in reducing exposure. It has also become prudent to consider what could cause the “cult of
luxury” to end. Part II of this MRB Themes Report (which will be released on January 14) will
provide several ideas of what could undermine this theme and also highlights the potential for
knock-on effects and a broader economic/financial market fallout.
Phillip ColmarDavid Stubbs
The Macro Research BoardPhillip Colmar [email protected]
Peter Perkins [email protected]
Mehran Nakhjavani [email protected]
Warren Smith [email protected]
Investors should resist chasing this theme further... ...it is prudent to begin reducing exposure
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mrb THEMES m January 7, 2014
Country2003 Net Worth
(US$ bn)2013 Net Worth
(US$ bn) # of Billionaires
U.S. 703.4 1872.5
Germany 140.5 296.3Hong Kong 33.2 193.1France 45.2 142.9United Kingdom 29.8 121.1Italy 29.6 112.9Spain 19.3 100.0Canada 44.9 92.1Sweden 43.9 88.3Australia 5.4 73.1Taiwan 10.4 72.8Japan 48.9 68.4South Korea 5.0 56.4Switzerland 24.0 50.3Israel 5.0 46.3Singapore 8.9 31.6Austria 1.0 26.5Ireland 3.3 21.9Netherlands 7.2 21.3Denmark 5.3 18.5Norway 1.0 17.1Czech Republic 0.0 14.9Cyprus 0.0 13.7New Zealand 0.0 9.2Greece 3.3 8.6Portugal 1.4 8.6Belgium 1.0 5.8Monaco 0.0 4.5Finland 0.0 3.1Guernsey 0.0 1.5Advanced Economies 1220.9 3592.8
Russia 36.6 427.1
China 0.0 263.0
India 17.4 193.6Brazil 8.5 189.3Mexico 24.0 148.5Turkey 8.9 74.2Chile 4.4 61.4Saudi Arabia 40.2 55.6Indonesia 1.4 55.3Malaysia 8.4 48.8Philippines 3.1 39.9Thailand 2.4 38.6Colombia 1.0 34.5Ukraine 0.0 32.1Peru 0.0 23.3South Africa 4.2 22.0Nigeria 0.0 20.8Egypt 0.0 18.6Lebanon 3.8 14.0Argentina 1.6 11.1Poland 0.0 9.8Venezuela 8.3 9.8U.A.E. 2.0 9.8Kazakhstan 0.0 9.2Morocco 0.0 6.5Kuwait 5.1 6.2Georgia 0.0 5.3Swaziland 0.0 3.1Angola 0.0 2.0St. Kitts and Nevis 0.0 1.5Vietnam 0.0 1.5Romania 0.0 1.1Belize 0.0 1.0Nepal 0.0 1.0Emerging Economies 181.3 1836.06
Global 1402.2 5431.8
Table A1 Global Billionaires 2003/2013
Source: Forbes
74 478
475 951 1426
552
401 473 874
MRB Partners Inc © 01/2014
Billionaires In 2003Additional Billionaires In 2013
MacroResearch Board
I n d e p e n d e n t I n v e s t m e n t S t r a t e g y
partnersmrb
18M R B PA R T N E R S I N C . m w w w . m r b p a r t n e r s . c o m m C o p y r i g h t 2 0 1 4 ©
January 7, 2014
Copyright 2014©, MRB Partners Inc. All rights reserved.
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This document is the property of MRB Partners Inc. and should not be circulated without the express authorization of MRB Partners Inc. Any use of graphs, text or other material from this report by the recipient must acknowledge MRB Partners Inc. as the source and requires advance authorization.
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