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Like Emerging Markets? Look To Luxury Consumers

Marc Halperin

If you've heard it once, you've heard it a thousand times--if you are long-term investor, you want to be in the emerging markets, particularly Asia. The projected population growth in developing countries is roughly three times that of the developed world. Their middle classes are exploding. And their collective GDP already is half that of the world and growing. But maybe you just can't shake those visions of currency meltdowns or political dictatorships.

So what are you to do? Instead of investing directly in companies in emerging markets, try investing in companies that provide them with high-end products and Western brands, from cars to spirits to watches. There's enormous demand from consumers in Asian emerging countries to show off their wealth, and what better way to do this than to drive a Mercedes or BMW, offer guests a Johnny Walker Black scotch and wear a Harry Winston diamond-studded watch on your wrist.

The affinity for luxury goods and Western names is a byproduct of expanding personal wealth and upper-income classes not only in China and Hong Kong but throughout the emerging markets. Nevertheless, much of the focus has been on China, where premium autos like BMW, for example, saw 2012 sales jump roughly 30 percent year-over-year. More recently, General Motors said Cadillac sales in China soared 32 percent in March from a year ago.

On a much smaller scale, luxury watches and jewelry also represent promising opportunities within the premium-goods segment. Chinese travelers account for 43 percent of global watch purchases made by tourists, a share that likely will increase given that Chinese outbound travel is projected to increase by at least 14 percent in each of the next five years. Overall, the average Chinese luxury consumer spends $18,650 during a trip, with an average transaction price of $1,127. Among companies well positioned to benefit from this trend is Switzerland's Richemont and Swatch. Richemont's portfolio includes some of the most prestigious brands in jewelry and watches--Cartier, Piaget, VanCleef & Arpels, Vacheron Constantin, Jaeger-LeCoultre and IWC--as well as top-line writing instruments, accessories and leather goods brands Montblanc, Dunhill and Lancel.

It's not just the luxury goods and auto sectors that are benefiting from emerging-market demand. Global income growth has a positive impact on consumer staples such as the beverage and spirits sector. While consumers drinking habits are not cyclical, consumers to tend to upgrade their brands and spend more as they become more prosperous. This fact suggests that as the international economy improves, demand and consumption of higher-end spirits is likely to accelerate significantly. This is particularly true in emerging markets, where more affluent consumers have acquired a taste for expensive Western spirits. This may bode well for companies such as Britain's Diageo, which owns or controls the world's top premium Scotch and Canadian whiskey, vodka, gin and liqueur brands, and also owns the Guinness beer label and a major stake in Moet Hennessy.

In short, there's an option for investors who on the one hand would like to capitalize on growth in Southeast Asia and other emerging-market regions but on the other, remain wary about the potential risks of direct investment in such countries: Western companies with iconic brands who are already there.

With more than 30 years of investment experience, Marc Halperin co-manages the Federated International Leaders Fund. He is responsible for portfolio management and conducts global equity research focusing on the financials, industrials and consumer discretionary sectors.

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