2024 Luxury Outlook: A Tale Of 2 Halves And New Catalysts

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Global luxury stocks posted strong returns during the pandemic, fueled by stimulus and a surge in online shopping.KraneShares Global Luxury Index ETF provides convenient access and exposure to leading...

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Although China's extended lockdowns dragged performance in 2022, top luxury names exploded to a hot start last year as China officially reopened. The sector gained over 60% during the first half (1H) of 2023 on an anticipated uptick in outbound travel from Mainland China and increased consumer activity.1 However, growth began to normalize in the second half of the year. Now, with top luxury names sitting at attractive valuations, luxury stocks may be poised for a strong 2024. The luxury market is embracing an improving macroeconomic backdrop and new future growth drivers like brand extensions, the U.S. Sun Belt migration, and rising wealth in the Middle East. Data from Bloomberg as of 12/31/2023. Industry Growth Update Many luxury research analysts predict a slowdown in 1H luxury sales growth, which we believe is a return to normalized growth after a period of accelerated expansion. The global luxury goods market has a compound annual growth rate (CAGR) of 6% from 1996 to 2022, with only two significant declines.2 Investors could see a stronger rebound in the second half of 2024, with HSBC (HSBC) citing an expected 8% increase in sales growth in fiscal year 2024.3 While inflation continues to weigh on traditional consumer staple companies, Marc Metrick, CEO of luxury fashion and designer clothing store Saks, told Yahoo Finance that he is \"not seeing any signs of consumers trading down luxury to save money. Luxury is permanent; luxury is here to stay,\" Metrick stated. \"People are not going to trade down out of it. Folks that reached in, maybe a few years ago, even last year, might not be reaching in this year, but the core luxury consumer doesn't trade down.\" Looking ahead, Metrick believes 2024 will be a year of two halves, which aligns with HSCB's expectations. While the first half of 2024 is uncertain, US economists expect more dovish policies in the second half of 2024. Lowering rates makes borrowing money cheaper, resulting in consumer and business spending, as well as increased investment, which can boost asset prices. Historically, any policy that the U.S. Federal Reserve System (Fed) implements, the European Central Bank (ECB) follows. A dovish policy approach in the U.S. and Europe may be a substantial catalyst for the KraneShares Global Luxury Index ETF (KLXY), as most luxury companies are listed on European exchanges. We expect top luxury names to monetize the global economy's recovery by expanding capacity, raising prices, and increasing brand investment. Proven Track Record The luxury market has a proven track record of strength and resilience in uncertain periods thanks to numerous fundamental characteristics tied to the sector. In KraneShares' last report: 'Global Luxury: A Golden Opportunity?', we covered underlying values like the \"true-luxury\" consumer and future growth drivers like expanding E-commerce efforts and rising wealth in China. In this report, we will dive into untapped and innovative ways luxury companies can capture new growth, including brand extensions, the U.S. sunbelt boom, and rising wealth in the Middle East. Brand Extensions When it comes to luxury, branding is everything. Luxury is often referred to as a mindset. Luxury products with the right branding can capture this mindset and can be sold at a significant price markup. In today's social media-dominated world, luxury companies have evolved past traditional marketing toward a focus on immersive experiences that allow consumers to step into the world of the brand. Moving forward, we believe luxury companies will expand past conventional promotion efforts by providing buyers with a 360-degree luxury lifestyle beyond fashion and beauty. In recent years, we've witnessed luxury companies experiment with brand extensions by opening restaurants, cafés, hotels, and other alternative business lines worldwide to drive foot traffic in stores and attract new customers. One instance of a successful brand extension was in February 2020, when LVMH (OTCPK:LVMHF) brand Louis Vuitton (9.68% weight in KLXY as of 12/31/2023) opened its largest flagship store in Japan, with its first Louis Vuitton cafe, 'Le Café V,' situated inside the store's top floor. Influencers and aspirational consumers flocked to the store at the chance to take a picture in Louis Vuitton's café. Through this phenomenon, the brand's Japan store transformed into a luxury destination, with influencers providing organic online coverage and marketing, resulting in elevated foot traffic and sales. Source: Instagram as of 1/30/2024. We expect the luxury sector to continue to offer experiences in the areas of dining, travel, and entertainment to help build brand value, secure new customers, and potentially increase revenue growth in keystone business lines over the next decade. Source: Company websites as of 1/30/2024. U.S. Migration to the Sun Belt Ever since Tiffany & Co. paved the way for New York's commercial development of Fifth Avenue in 1940, the city has been synonymous with luxury shopping. In the late 1970s, the emergence of Rodeo Drive cemented Los Angeles as a global luxury epicenter. Now, we are seeing a new wave of luxury expansion beyond traditional luxury cities into the Sun Belt states. Source: Clarion Partners as of 4/1/2019. Luxury brands are investing heavily in the southern strip of the U.S. after a surge in popularity during the pandemic. In 2023, Texas was home to 6 of the 15 fastest-growing cities in North America.4 Other Sun Belt cities like Miami, Tampa, Charleston, and Phoenix are experiencing significant population growth as well. As these Sun Belt cities develop, so will traditional brick-and-mortar shopping hubs. Leasing by luxury retailers in the south has already shown signs of growth. Nearly half of new luxury store openings in 2022 were in the southern belt of the United States.5 Research firm JLL stated, \"Luxury retailers recorded significant revenue growth across the board last year (2022) and have cited retail store expansion as a key driver of that growth.\"6 We believe that the Sun Belt migration will serve as a mega trend for luxury businesses over the next decade and provide further opportunities for expansion in the US. Source: CoStar as of 9/13/2023. Rising wealth in the Middle East The Middle East is transitioning to a new age of growth. Governments in the region are utilizing wealth created through the energy sector to invest in a new-age economy. This evolution may provide a significant opportunity for further prosperity and the emergence of ultra-wealthy families in the Middle East. While the global wealthy population is projected to expand by 57% by 2027, the Middle East is on track to significantly outpace global growth with an expected 82.4% rise in High-Net-Worth Individuals (HNWI) and a 33% rise in Ultra-HNWI over the same period.7 The rise of wealth in the Middle East indicates a significant increase in disposable income and capital in the region. This will likely translate into heightened demand for luxury goods, as affluent individuals and families often seek high-end products to reflect their status. Gucci, a brand owned by Kering (OTCPK:PPRUF) (4.12% weight in KLXY as of 12/31/2023), expanded its high jewelry collection to the United Arab Emirates (UAE) in March 2022. Additionally, the brand inaugurated its second high jewelry boutique in Kuwait, following the success of its initial boutique in Paris. According to Patrick Chalhoub, the CEO of the Dubai-based luxury retailer and distributor Chalhoub Group, renowned brands like Chanel, Hermès (5.85% weight in KLXY as of 12/31/2023), Louis Vuitton (9.68% weight in KLXY as of 12/31/2023), Cartier (7.79% weight in KLXY as of 12/31/2023), and Tiffany are actively implementing local strategies in the UAE.8 These strategies aim to engage consumers in the region through collaborations, dedicated collections, and immersive events set in iconic locations such as Al-Ula in Saudi Arabia. We believe the Middle East could become a more influential market for global luxury brands in the coming years, akin to established markets like the US, Europe, and China. Source: Knight Frank Wealth Sizing Model as of 1/30/2024. Opportunity The KraneShares Global Luxury Index ETF provides convenient access and exposure to leading developed market luxury companies listed across multiple exchanges, including in the United States, France, the United Kingdom, Italy, Switzerland, and Japan. These companies operate across all global luxury industries, including leather goods, jewelry, accessories, skincare, cosmetics, beverages, travel, and supercar businesses. We believe the return of reasonable valuations in the global luxury sector entering 2024 may offer investors a compelling long-term growth opportunity. The 12-month forward consensus PE for the luxury sector dropped from a peak of 40X during the pandemic to 26X by the start of 2024, which is closer to the 20-year average. This valuation is particularly attractive when weighing the fundamental characteristics of the luxury sector and the future growth drivers covered in this report. For KLXY standard performance, top 10 holdings, risks, and other fund information, please click here. Holdings are subject to change. This should not be regarded as investment advice or a recommendation of specific securities. Holdings are subject to change. Securities mentioned do not make up the entire portfolio and, in the aggregate, may represent a small percentage of the fund. Definitions: Compound Annual Growth Rate (CAGR): The mean annual growth rate of an investment over a specified period of time longer than one year. Citations:  Data from Bloomberg as of 12/31/2023. Data from Bain & Company as of June 2023. Data from HSBC as of December 2023. Data from Raleigh Realty as of August 2023. Data from Forbes as of October 2023. Data from JLL as of October 2023. Data from Knight Frank LLP as of December 2023. Data from Jing Daily & Chalhoub Group.  Carefully consider the Funds' investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Funds' full and summary prospectus, which may be obtained by visiting: www.kraneshares.com. Read the prospectus carefully before investing. Risk Disclosures: Investing involves risk, including possible loss of principal. There can be no assurance that a Fund will achieve its stated objectives. Indices are unmanaged and do not include the effect of fees. One cannot invest directly in an index. This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change. Certain content represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results; material is as of the dates noted and is subject to change without notice. KLXY may invest in derivatives, which are often more volatile than other investments and may magnify KLXY's gains or losses. A derivative (i.e., futures/forward contracts, swaps, and options) is a contract that derives its value from the performance of an underlying asset. The primary risk of derivatives is that changes in the asset's market value and the derivative may not be proportionate, and some derivatives can have the potential for unlimited losses. Derivatives are also subject to liquidity and counterparty risk. KLXY is subject to liquidity risk, meaning that certain investments may become difficult to purchase or sell at a reasonable time and price. If a transaction for these securities is large, it may not be possible to initiate, which may cause KLXY to suffer losses. Counterparty risk is the risk of loss in the event that the counterparty to an agreement fails to make required payments or otherwise comply with the terms of the derivative. KLXY is subject to non-U.S. issuers risk, which may be less liquid than investments in U.S. issuers, may have less governmental regulation and oversight, are typically subject to different investor protection standards than U.S. issuers, and the economic instability of the non-U.S. countries. Fluctuations in currency of foreign countries may have an adverse effect to domestic currency values. KLXY invests in companies in luxury-related sectors that may face intense competition and be dependent on their ability to maintain brand image. These companies may be subject to changes in consumer preferences and the spending of a relatively small segment of the general population, and technologies employed by the companies that may become obsolete. The companies can be especially sensitive to a decline in consumer confidence or any downturns in the broader economy. Demand for luxury products may be seasonal, and incorrect assessment of future demand can lead to overproduction or underproduction, which can impact company profitability. KLXY is new and does not yet have a significant number of shares outstanding. If KLXY does not grow in size, it will be at greater risk than larger funds of wider bid-ask spreads for its shares, trading at a greater premium or discount to NAV, liquidation and/or a trading halt. Narrowly focused investments typically exhibit higher volatility. KLXY's assets are expected to be concentrated in a sector, industry, market, or group of concentrations to the extent that the Underlying Index has such concentrations. The securities or futures in that concentration could react similarly to market developments. Thus, KLXY is subject to loss due to adverse occurrences that affect that concentration. KLXY is non-diversified. ETF shares are bought and sold on an exchange at market price (not NAV) and are not individually redeemed from the Fund. However, shares may be redeemed at NAV directly by certain authorized broker-dealers (Authorized Participants) in very large creation/redemption units. The returns shown do not represent the returns you would receive if you traded shares at other times. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns. Beginning 12/23/2020, market price returns are based on the official closing price of an ETF share or, if the official closing price isn't available, the midpoint between the national best bid and national best offer (\"NBBO\") as of the time the ETF calculates the current NAV per share. Prior to that date, market price returns were based on the midpoint between the Bid and Ask price. NAVs are calculated using prices as of 4:00 PM Eastern Time. The KraneShares ETFs and KFA Funds ETFs are distributed by SEI Investments Distribution Company (SIDCO), 1 Freedom Valley Drive, Oaks, PA 19456, which is not affiliated with Krane Funds Advisors, LLC, the Investment Adviser for the Funds, or any sub-advisers for the Funds. 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