06 Nov 2019

Luxury Index shows strong diamond performance

Last week we shared an article that appeared in both The Financial Review and in Bloomberg, which looked at the pending closure of the Argyle Mine, and why it will likely kick-start another leg higher in the pink diamond market.

This week we wanted to share some findings from a recently published update from Knight Frank, whose regular Luxury Investment Index highlights the performance of a range of boutique assets favoured by High Net Worth investors the world over, from whiskey, to wine, to cars, coins, art, watches, stamps, furniture, and of course, coloured diamonds.

The recent Knight Frank update, which focused on the performance of coloured gemstones, noted the strong rise in these gemstones, which had outperformed the broader jewellery market.

The report also highlighted the strong performance of diamonds, and included the following chart, which shows the growth over 10 years in a range of luxury investment assets, including coloured diamonds.

Knight Frank Luxury Investment Index

Source: Compiled by Knight Frank Research using data from Art Market Research (art, coins, furniture, jewellery, stamps and watches), Fancy Coloured Research Foundation (coloured diamonds), HAGI (cars), Rare Whiskey 101 and Wine Owners. All data Q1 2019 except watches (Q2 2018) and coins, furniture, jewellery and stamps (Q4 2018, stamps provisional).

As you can see, coloured diamonds as a whole have had an excellent decade, more than doubling in value in the ten years to end Q1 2019, with total growth of 113%, or approximately 8% per annum.

Pink diamonds, which are our speciality at Australian Diamond Portfolio, have of course outperformed the broader coloured diamond market, with returns of over 12% per annum since 2005, a return that would make them the second highest performing asset on the chart above.

Diamonds are easily accessible for investors

Whilst some luxury assets have outperformed pink diamonds over the last ten years – diamonds have a handful of benefits which make them more attractive, and more accessible, to a wide range of investors.

The first of those is the size of the market. Whilst whisky was the highest performer in the above index, in some cases it can be an incredibly small market, with the update from Knight Frank mentioning the fact that one of the bottles of whiskey that had risen so much was just one of twelve in existence.

These assets are rare, and are also clearly valuable, but they are not accessible for everyday investors.

Luxury cars and Art have similar characteristics. There is no doubt that the super-rich are buying these assets, but it is not practical for everyday investors to spend over $100m on a Monet, or over $50m for a Ferrari 250 GTO.

And whilst it’s true that some pink diamonds also sell for tens of millions of dollars, the reality is that most investors can access the market, with high quality stones available for as little as AUD $20,000.

Assets like art and cars are also significantly more difficult to store, with humidity and climate controls needed to store art, whilst the actual physical space to store a car is significantly larger than the space required to store an asset like a pink diamond.

Supply profile for diamonds is more attractive

It’s also worth pointing out that none of these other asset classes are facing as prodigious a shift in their supply outlook as pink diamonds are. As we have stated in previous updates, the total quantity of items like fine art will continue to grow in the years ahead, as talented artists continue to create their masterpieces.

Pink diamonds are nature’s masterpiece, and with the Argyle Diamond Mine set to close in 2020, the new supply of these masterpieces will come to an almost complete halt.

This massive reduction on the supply side can’t help but be price positive over time, with higher demand inevitably feeding through to prices. This is especially true given how accessible pink diamonds are, and how easily they can be bought, stored, valued and eventually sold when working with experts like Australian Diamond Portfolio.

Pay attention to the Boss!

Before finishing this week’s “In the Loupe”, we wanted to share an additional risk factor, and a chart to back it up, which highlights why we are so concerned about the economic outlook in the developed world, and why rising recession risks will help drive demand for rare tangible assets like pink diamonds.

And that risk factor is the outlook of company CEO’s when it comes to their view on how the US economy will fare in the coming years. The chart below goes back just over forty years to the middle of the 1970s and highlights confidence levels based on a survey of company CEOs (pink line), as well as of regular consumers (black line).

 

CEO and Consumer Confidence on Different Planets

CEO and Consumer Confidence

Source: Quill Intelligence, Conference Board. Recessions Shaded.

Maybe we are being overly pessimistic, but if the people in charge of running companies see tougher times ahead, then we think the next few years are likely to be difficult in terms of the outlook for employment, for wage growth, capital investment and ultimately economic growth. It will also be a challenging environment for corporates to grow their earnings, which will be required if record high stock prices are to continue rising.

In such an environment, it is only natural that central banks and federal governments will respond in an effort to stimulate the economy. If the last ten years teaches us anything, that stimulus will come in the form of even lower and in some cases negative interest rates, more money printing, and higher budget deficits.

Over the medium to long-term, that can’t help but be positive for hard tangible assets, including pink diamonds.

As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and look forward to any questions or comments you may have.

 

 

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