Savour International

The stars on the European luxury market are prepared for a tough year. When consumers restrict their expenditure, why should they not also stop purchasing luxury goods such as Cartier watches or Louis Vuitton bags? How are manufacturers of goods for the rich and beautiful people meant to sustain producing goods in expensive euros and selling them for weak dollars? Only recently did Richemont, the manufacturer of Cartier watches, and Coach, the American handbag company, post disappointing sales results. And last week, the Italian shoemaker Todd's also sounded alarm bells due to falling demand.

Market leader in this sector, LVMH, was at least partly able to chase away the dismal attitude. The company announced that it was able to increase its annual surplus by 8 per cent to 2.02 billion euros. Despite the "deterioration" in the economic situation, at LVMH, the assumption is that this year's results will also end with positive growth rates.

LVMH's optimism seems to contain several important lessons. Firstly, the company was able to achieve higher dollar prices, yet without the collapse of American sales. This suggests that rich American consumers can afford - or at least still afford - to spend money. Secondly, at least the global players are profiting from the boom in demand in Asia. For instance, Richemont announced that China and Hong Kong overtook America last year as the top buyers of Cartier watches.

Luxury warships such as LVMH therefore appear to be in a better position to weather storms than small speedboats under family ownership. The industry's big companies are better positioned in the rapidly growing Asian market, while smaller competitors have to be especially careful about new investments. For LVMH or Richemont, the time could be even right just now to acquire competitor family-owned companies that start to falter.

Perhaps, investors whose transactions since the start of the year have driven down the value of shares for producers of luxury goods should also take another and more careful look. Currently, Richemont is being traded at levels that are 10.2 times higher for forthcoming profits in the year ahead (without taking into account profits from the tobacco trade). According to information provided by Vontobel, the Swiss bank, LVMH stock is also being traded at 13.1 times its value. Yet these key figures are at their lowest level since the attacks on 11 September 2001. This value seems decidedly too low, even without taking into account the possibility that the chill affecting the American economy may turn into serious and sustained global influenza.