Luxury goods stocks continue to sparkle in Switzerland

Deutsche Bank says the luxury goods sector is especially promising in the current financial climate, while Bank Vontobel in Switzerland has launched its fifth structured product based on a basket of luxury and fashion goods

Rising demand emanating from emerging markets countries means the luxury goods sector has "never had it so good", according to research from Deutsche Bank.

The report, Global Luxury Goods, Stronger Brands, Higher Profit, pinpoints several factors it says make the sector ripe for investment. Notably, it argues that since the global financial crisis, luxury goods companies have been seizing greater control over brand image, merchandising and pricing, which has resulted in increased brand awareness and profit margins remaining healthy. Meanwhile demand for luxury items has remained strong in emerging markets, especially in Asia. The S&P Luxury Goods index has risen 6.62% in the past 12 months, for instance. 

"What our research teams are arguing is that margins are high, but justifiably so," says Francesca Di Pasquantonio, a Deutsche Bank equity research analyst in Milan. "Those strong margins and earnings growth potential could actually continue over the next few years just because of structural changes within the industries."

The report coincides with the impending issuance by Vontobel of its latest structured product linked to the sector – the fifth release of 'Voncert' certificates based on a basket of luxury stocks. The product was launched on Monday, July 2 and is called Luxury & Fashion V. It is based on an equally weighted basket of 11 stocks, including Hugo Boss, Prada, Swatch and LVMH Moët Hennessy Louis Vuitton, which all feature within Deutsche Bank's four top stock picks.

The 200,000 two-year ‘Voncert' certificates are issued by Vontobel Financial Products Dubai at a price of Sfr99.20 ($103.77) and are guaranteed by the Swiss bank's Zurich branch, which is rated Single A/A2 by Standard & Poor's/Moody's. Initial fixing is on July 17. The certificates mature on July 16, 2014 and will be listed on the Six Swiss Exchange.

What our research teams are arguing is that margins are high, but justifiably so

This latest structured product will launch on the same day that Vontobel's Luxury & Fashion IV closes. This previous product had an issue price of Sfr99.40. It has also run for two years and is based on a basket of 11 stocks. It has seen highs of 71.8% above par, and a low of 117.8% last August. Two weeks before the final fixing date, the value of the certificate is staying just above the 150% mark, meaning investors should expect healthy returns at maturity.

Despite the ongoing appeal of this tracker certificate, Eric Blattmann, head of public distribution financial products at Vontobel in Zurich, says he has not seen a significant increase in interest in luxury goods. "At the moment, almost nothing is increasing in respect to delta 1 products on themes, but we do see some demand in this sector and on yield-enhancement products with underlyings from this sector," he says. "But it's not like it's picking up massively."

Blattmann adds that the biggest risk to these stocks is developments in the Asian markets, as well as emerging markets overall. "We have the risk of a hard landing in China, in which case the luxury goods sector probably will not perform as expected," he says.

As far as investment opportunities are concerned, strategists at Deutsche Bank believe the time is right for buying options in Swatch Group.

"We looked at what the volatility market was pricing in, and what we found was that puts are very expensive relative to calls. In other words, implied volatility skew is steep," says Simon Carter, strategist at Deutsche Bank in London.

"This means it is very efficient to construct a bullish risk reversal through selling a downside put to fully fund buying an upside call option, and to use this structure as an alternative to buying stock," he adds.