- We maintain our cautious view on the luxury sector due to anticipated slowdown in consumer spending across US, China, and Japan
- Earnings growth has been revised down significantly since Liberation Day and the sector is unlikely to benefit from the recent EU-US tariff relief
- We favour companies with less US exposure, strong pricing power and brand desirability, and robust underlying fundamentals
- Selective investment opportunities on Quiet Luxury brands remain, as they are better positioned to withstand the current climate given their superior quality, heritage, and exclusivity
- Spending by affluent consumers, which is more bolstered against economic headwinds, should further support the Quiet Luxury market
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Cautious stance on weakening luxury market. A sense of caution pervades the luxury sector, with Bain & Company forecasting a contraction of 2-5% in 2025. This anticipated downturn is primarily attributed to the weakening of consumer discretionary spending across key markets, notably the US and China, as ongoing economic uncertainty weighs on consumer confidence. Even the resilient Japanese luxury market, which performed strongly in 2024, is experiencing a slowdown this year due to declining tourist spending, especially from Chinese, impacted by a strengthening yen.
15% tariffs on EU goods still pose a meaningful risk. The EU and US have agreed on 15% US tariffs on EU imports, with EU goods already facing a 10% levy since Liberation Day. While the tariffs are lower than Trump’s 30% threats earlier this month, the luxury sector is unlikely to benefit from this relief and will continue to face demand pressures amid a deteriorating global outlook. Accordingly, global luxury sector earnings growth forecast has been revised down to -3% from +12% at the start of April.
Sector-specific exemptions are unlikely due to limited manufacturing capacity within the US. Luxury brands may respond by raising prices in the US, prompting tourism to Europe. Shifting production overseas will be limited due to specialised craftmanship and skilled labour shortage. However, fully passing the increased costs to US consumers is also unlikely given the weak consumer sentiment.
Given this outlook, we favour luxury companies with i) lower exposure to the US market, ii) strong pricing power and brand desirability, allowing them to capture a structurally growing ultra-high-end demand, and iii) robust underlying fundamentals as they are better equipped to weather near-term pressures.
Quiet Luxury prevails. As highlighted on our report Luxury, Redefined, Quiet Luxury brands are better positioned to withstand the current environment given its quality excellence, strong brand heritage, and product offering exclusive to the most affluent clients. The luxury market has been experiencing shifts in consumer preferences where consumers are desiring Quiet Luxury aesthetics and exclusivity, and timeless, investment-grade jewelleries. In 2024, demand for jewellery remained robust with 2% market growth, as reported by Bain & Company, while the leather goods market weakened by 5%.
Affluent individuals continue to spend. This market’s resilience stems from the fact that high-net worth individuals’ spendings are more bolstered by economic headwinds. The most affluent clientele may only represent less than 1% of the global luxury market, but are responsible for a remarkable 23% of the total value in 2024. Boston Consulting Group indicates that 85% of these top-tier customers anticipate maintaining or increasing their spending in the near future. In contrast, a more cautious outlook prevails among aspirational customers, who comprise 60% of global luxury market. 65% expect to maintain or reduce their spending levels, reflecting a sluggish outlook for the loud luxury market.
OBBB a tailwind for Quiet Luxury. Trump's "One Big Beautiful Bill" (OBBB) has sparked market concerns about its potential to dampen US consumer spending. The Congressional Budget Office has highlighted the bill's uneven distribution of benefits, projecting that the wealthiest individuals will enjoy annual savings of 2.3%, while those with the lowest earnings could face annual losses of 3.9%. This disparity raises concerns about the bill's impact on overall consumer confidence and spending. However, we anticipate that the financial repercussions for high-net-worth individuals will be minimal, bolstering the continued demand for Quiet Luxury.
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