Crazy rich Asian luxury goods demand holds firm

The global luxury market is dominated by China, and Asia more generally, and women now play a powerful role in consumption patterns, accounting for half of Chinese demand

Despite the downturn in the equity market this year, the luxury market in Asia is generating moderate performance, inflating the Julius Baer Lifestyle Index to a record high growth. China, which accounts for one-third of the global luxury spending, is driving the momentum, with major themes of re-shoring to domestic consumption and the purchasing power of women coming to the fore.

The 2017/2018 Julius Baer Lifestyle Index, which measures the cost for a basket of goods and services typically consumed by high net worth individuals (HNWIs) in Asia, rose by 3.34% in local currency terms and 2.91% in US dollar terms.

"This is the historical price growth of our Lifestyle Index since its inception back in 2010/2011," says Pearlyn Wong, executive director of markets and advisory solutions Asia Pacific at Bank Julius Baer, noting that the Index has been in a general uptrend since 2015/2016.

Price growth in the Asian luxury sector was in line with trend growth and a variety of factors at play mitigates against more explosive luxury inflation growth. One major moderating influence is the subdued wealth effect during recent times.

"The thing that has not been doing well in this year is the volatility and the equity market," explains Bhaskar Laxminarayan, chief investment officer and head investment management of Asia at Bank Julius Baer, noting luxury consumption can be influenced by the equity market given the fact that when the equity market performs well, people tend to spend a bit more, the so-called wealth effect. "It (the equity market) has not been a disaster, but it could have been better," he adds. "We have to understand, that the luxury market is influenced primarily by China and secondly by Asia," says Laxminarayan. Chinese nationals account for 32% of the spending in the entire global luxury goods industry, according to the recent wealth report by Julius Baer.

This proportion was only 2% just 15 years ago. Since 2010, China has started to take a prominent position in the global luxury market. Some analysts even estimate that China accounts for almost half of the luxury spending globally.

"That is huge. If you look from a growth perspective, more than 70% of the growth of luxury goods spending comes from China," says Laxminarayan. He points out that to understand demand patterns it is necessary to look into the country's consumption sentiment, the liquidity in the market, and policies relating to different economic factors, including renminbi matters and overseas tourism.

China's domestic economy shows moderating growth, which might hurt the momentum in consumption. In this context, there has been much discussion over whether the country is going through a consumption upgrade or downgrade. Some analysts believe that with the rise of the new wealth in China, more people are shifting to high-end consumption. However, some analysts voice opinions pointing to the success of e-commerce platforms, such as Taobao and Pinduoduo, which chimes with the consumption downgrade theme.

In terms of consumer confidence, although it has been a general upbeat trend since 2016, Julius Baer observes some moderation in China this year. "We are at a flattish period for consumer confidence," says Wong. "It is still a healthy kind of consumption in China. We do believe this will sustain," says Laxminarayan.

One important theme for Chinese luxury consumption is re-shoring. Chinese nationals have been going abroad to buy luxury goods during the previous years, but more recently, there has been a 're-shoring' trend whereby in this context Chinese consumers increasingly buy these goods onshore instead of offshore.

"This phenomenon is continuing this year," says Wong, who notes that this is one driver of onshore luxury goods pricing.

"The tax cut on a large number of items in China helps promote sales onshore. And the regulator started to crack down on the channels selling non-authentic luxury goods. These two factors will help to further drive the re-shoring demand," says Wong.

Another theme revolves around the purchasing power of women in Asia, including China. "In terms of how much they buy, women now account for half of the Chinese luxury spending, up from 10% in 1995," says Wong.

This is related to their growing wealth. Asian women, particularly in Malaysia, Thailand and China, are increasingly becoming self-made millionaires, according to a study by Agility Research & Strategy.

As more women generate their own wealth, they are increasingly controlling the deployment of their assets. According to Julius Baer's report, the majority of women surveyed across China (87%), India (80%), Hong Kong (71%) and Singapore (59%) are financial decision-makers in their households, exceeding the proportion observed in the US (44%).

Looking ahead, into 2019, Julius Baer remains optimistic about equity markets, this is premised on global economic growth, buybacks, corporate profitability and a no-hard-landing scenario in China. "As long as the US growth goes up, I think that you will find the overall growth in the global market to be positive. We are still going to have reasonable and positive global growth in 2019," says Laxminarayan.

Laxminarayan sees potential in Asia, which accounts for 50% of the luxury consumption globally. "If you include Japan, this number probably climbs to between 60% and 70%. This part of the world is huge when it comes to luxury consumption."

"We have seen reasonably good luxury consumption this year. And we do see that sustaining for 2019 as well," Laxminarayan adds.

While Asia's wealthy consumers will maintain their leading role in the growth of the luxury goods market, their tastes continue to evolve and mature. In the next decade, a rising proportion of Asian consumers will be younger (40% Gen-Z and millennials), digitally-connected, price-sensitive, socially-conscious and female, according to the report.

Recognizing and adapting ahead of time will be imperative to maintain growth, not only for luxury brands but for the financial services industry as a whole, the report suggests.