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How your vanity is making people rich

Kevin Winter | Getty Images

The vanity products business is booming, but the golden age is still to come as demographic trends firmly favor small luxuries, according to Bank of America Merrill Lynch.

"[Globally], vanity capital is approximately $3.7 trillion, and about the size of the German economy, the fourth largest in the world," BofAML equity strategist Ajay Shingh Kapur said in a note on Tuesday.

With the market projected to grow to $4.5 trillion by 2018, vanity products are "one of the few areas in global consumption that is seeing above average growth," he said.

Vanity products need not be expensive, but they must not be cheap. Typical products range from cosmetics and smartphones, to fitness wear and health foods. However, they also include high end products like luxury property, art, cars and fine wine.

"The really low-end stuff—cheap T-shirts, sneakers and watches, for example—probably do not qualify" because "they are merely utilitarian," said Kapur.

Irresistible trend

Demographic trends look set to boost spending: Women have more disposable income and particularly prone to spend on small luxuries that promise to improve their appearance, according to Kapur.

A case in point would be anti-aging cosmetics.

At the younger end, over 40 percent of 25 to 35 year old Americans surveyed by BofAML in April said they are already using or plan to use anti-aging products. "25 is the new 50," said Kapul.

At the other end of the demographic curve, at least in richer countries, the elderly are wealthier and have more to spend on small luxuries.

In the U.S., for instance, 65-75 year olds had the highest median net worth of all age groups, of just under $250,000 in 2013.

And "vanity seems a significant beneficiary—be it botox, luxury personal care, cosmetics or luxury baubles to enjoy their golden years," said Kapul.

Sales of anti-aging cosmetics grew by 5 percent to $25 billion in 2013, and sales are projected to rise by another 29 percent by 2018, according to an Euromonitor International report.

Outperforming

As spending grows, so have the stock prices of companies selling vanity products.

On average, Asia's Vanity Capital stocks have risen by 14.6 percent a year since 1995, outperforming the MSCI Asia ex-Japan Index by 11.7 percent a year, according to Kapul.

Some companies in the index have done better: The share price of Korean cosmetics firm Amorepacific Corp, for example, has risen nearly ten-fold percent since its IPO in June 2006. During the same period, the benchmark Kospi index has gained just under 70 percent.

Based on consensus estimates, Vanity Capital stock earnings are forecast to grow by 37 percent over the next two years, outstripping the MSCI world earnings growth of 17 percent.

However, the seemingly unstoppable spending growth could be derailed by an economic shock.

"The eventual withdrawal of [the Fed's] QE could generate volatility and unintended consequences; and while no one sees it now, the world economy could tip into a recession [or] deflation," said Kapul.