Senior equity analyst at Gareth Morgan Investments Nathan Field on why the rich - smug and ruthless though they be - make terrific customers.
If you ever wanted evidence of how wealthy people cope in a recession, look no further than the luxury goods sector.
Since 1995 the global market for luxury goods has only once suffered an annual sales decline. Unsurprisingly that year was 2009 - but it wasn't just because a whole
pile of money disappeared.
For a brief period no one in New York or London wanted to be seen sipping Bollinger, showing off their gold Rolex or shopping at Tiffany's.
Luxury brands were viewed as symbols of the greed and excess that caused the financial meltdown and even the super-rich realised it was in poor taste to drop $20,000 on a watch when millions were losing their jobs.
For once, Cartier and Louis Vuitton were out of fashion. But it didn't take long for the world's wealthiest consumers to overcome their shyness.
Aided by resurgent stock markets, extended tax cuts and a return to seven-figure bonuses, luxury goods sales have been rising strongly since the fourth quarter of 2009.
Rich people might be ruthless and smug, but they make terrific customers.
The stock market has cottoned on to this fact. In Europe, home to most of the world's leading brands, luxury goods stocks have outperformed the wider share market by about 250 per cent over the past 10 years.
Despite the doomsayers who predicted a prolonged, painful slump back in 2008, the luxury goods industry has proven to be remarkably resilient.
But the swift recovery in United States and European sales is only part of the story. Longer term, investors are even more excited about the potential growth in emerging markets.
Unlike lesser brands, luxury goods reach across a range of cultural and geographical divides. Rolex watches and Prada handbags are equally popular in Brazil, Saudi Arabia, Russia and China. The rich, it seems, want the same stuff the world over. After all, what use is a status symbol if nobody recognises it?
Emerging markets already account for about a third of luxury good sales, boosted by the popularity of overseas shopping trips.
China, in particular, has seen high-end consumption skyrocket over the past decade, and it recently overtook the US to become the second-largest luxury market in the world (behind Japan). Not bad for a so-called communist state.
Provided there aren't any surprise changes to import taxes, China is expected to drive at least 50 per cent of the growth in the luxury sector over the next five years.
The ongoing urbanisation of the population, the rise in disposable incomes and the trend towards Western displays of social status are all contributing to the market's rapid development.
Most of the growth will come from mainland China (as opposed to the established luxury Mecca of Hong Kong). Despite its considerable size, the luxury market in mainland China is still in its infancy. Only 30 per cent of purchases are made by women (versus more than half in mature markets), dozens of China's large cities don't have any luxury stores at all and the best-selling products are concentrated among a few major brands.
Even accounting for the country's unique demographics and stiff import taxes, these factors add up to one huge growth opportunity.
It's no surprise that the world's snootiest brands are falling over themselves to expand their Chinese store networks.
Given the high barriers to entry, mergers and acquisitions have been another key feature of the industry. It's difficult to create a status symbol or high-fashion label from scratch, and brand names with decades of history behind them have a big advantage over young upstarts.
In the most recent deal, French company LVMH took a controlling stake in Italian jeweller Bulgari for a whopping 31 times this year's earnings. The high multiple reflects the scarcity of ripe targets. There are now only a handful of luxury stocks that haven't been swallowed up by one of the major European holding companies.
The black cloud over the luxury sector is Japan - still a leading market even though sales have been in decline for the past three years. Recent tragic events will cut consumption across the board and expensive, unnecessary purchases could face an even bigger hit.
Some analysts are forecasting Japanese luxury goods sales will fall 30 per cent this year. But if past consumption patterns are anything to go by, high-end purchases won't be postponed for long. Given their privileged position, the well-off always find it easier to start spending again.
Nathan Field is a senior equity analyst at Gareth Morgan Investments.
