‘Lipstick Effect’ takes hold

Yasmine Raso

Senior Journalist, Financial Newswire

10 October 2022

Despite central banks continuing to hike interest rates in an effort to curb discretionary spending and mitigate rising inflationary pressures, consumers have indulged in what has become known as the ‘Lipstick Effect’.

The term is used to describe the tendency of individuals to purchase smaller and less costly luxury items to raise their spirits without “breaking the bank” as much as they would have normally, according to Insync Funds Management CIO, Monik Kotecha.

Kotecha said the macroeconomic landscape has seen most stocks take a dive as people attempt to reduce their spending, but some – on the flip side – are benefiting from the Lipstick Effect.

“Two examples of highly profitable companies in our portfolio benefitting from the Lipstick Effect are Lululemon and Ulta Beauty,” he said.

“In their recent quarterly earnings updates, Lululemon reported a 29% revenue increase and a 30% increase in earnings per share (EPS). Ulta Beauty reported a 17% increase in revenues and a 25% increase in EPS.”

Kotecha also said economic slowdown may temporarily stunt the growth of high-quality companies, but their long-term growth rates remain certain.

“We invest in highly profitable companies with long runways of growth that are backed up by megatrends,” he said.

“With this, comes the higher confidence around longer-term earnings growth rates, irrespective of macro-economic conditions.”