The Lipstick Index

Sometime in 2001, Leonard Lauder, billionaire heir to the Estee Lauder fortune noticed how, during recessionary periods, when consumer spending usually drops, sales of his products actually increased. Estee Lauder is one of the ten largest cosmetics companies in the world with a market cap of $81 billion. Lauder reasoned that while consumers may cut back on discretionary items, they still spent money on “affordable luxuries.” These items were not expensive, like apparel, jewelry or designer bags; rather, they were lower-priced goods, like makeup.

Lauder is credited with introducing the term “lipstick index” during 2001 recession in the US that followed the bursting of the dotcom bubble. The term describes how cosmetic sales bucked the trend and grew in recessionary times. Wall street took notice and the lipstick index soon began to be considered as a financial indicator that uses cosmetic sales to forecast bear markets or recessions.

Are Lipsticks “Recession-Proof?”

Even when other areas of the economy falter, makeup sales—and lipstick, in particular—aren’t as affected by inflationary pressures. Lipstick has wide profit margins: A tube of lipstick costs about $2.50 to produce yet can be priced as much as $35 for consumers. In addition, the cosmetics industry as a whole doesn’t match pace with other sector price increases. NielsenIQ recently reported that while prices for consumer-packaged goods rose 8% at the end of 2021, health and beauty goods increased by just half that amount at 4%.

And unlike food products or semiconductors, cosmetics aren’t as affected by volatile energy prices, outside of the costs of packaging and shipping.

Then there are other factors to consider, such as the very intrinsic value of lipstick. Throughout history, women have associated the application of makeup as an act of liberation. Psychoanalysts have equated brightly colored lipstick, down to its bullet-shaped tube, as a form of armor against the world. Advertisers often proclaim how a roll of lipstick could change someone’s mood—and even instill confidence.

Global trends are evident in the Indian market. The Indian market for personal care and cosmetics is predicted to grow by 3.86 percent yearly and by 143% in terms of volume year over year. The worldwide health and beauty retail business, and cosmetics in particular, have shown rapid and consistent growth since the pandemic in 2020. It is predicted that the market will top $100 billion globally in 2023.

Informal Index v/s Formal Index

While the lipstick index would be considered as an informal index, since it may not be relied on as a comprehensive economic indicator; there are other more formal indicators we may be familiar with when it comes to economic indicators. While the indices of the equity markets such as Sensex and Nifty50 are well known indicators of economic sentiment, a similar bench in the debt market which is closely tracked is the 10-year G-Sec.

The Government of India Securities (G-Sec) serves as the primary benchmark for the debt market. Within this category, the 10-year Government Bond (also known as the 10-year G-Sec) is particularly important and closely monitored. It represents the yield on the 10-year government bonds issued by the Reserve Bank of India (RBI).

While Indian Government Bonds are available with residual maturity of 3 months (6.760%) going all the way up to 40 years (7.241%), the 10-year G-sec (7.039%) is most followed as an economic indicator (data as of 10th June 2023). The importance of the 10-year G-Sec yield goes beyond just understanding the return on investment for the security. The 10-year is used as a proxy for many other important financial matters, such as lending rates.

G-secs, or government securities or government bonds, are instruments that governments use to borrow money. Governments routinely keep running into deficits — that is, they spend more than they earn via taxes. That is why they need to borrow from the people.

The 10-year G-Sec also tends to signal investor confidence. The RBI sells G-Sec via auction and yields are set through a bidding process. When confidence is high, prices for the 10-year G-Sec drop and yields rise. This is because investors feel they can find higher-returning investments elsewhere and do not feel they need to play it safe. But when confidence is low, 10-year G-Sec prices rise and yields fall, as there is more demand for this safe investment.

For what purposes is the 10-year G-Sec used as a proxy in India?

In India, the 10-year Government Security (G-Sec) is commonly used as a proxy for several purposes. Here are a few primary uses:

1. Benchmark Yield: The 10-year G-Sec acts as a benchmark for determining the prevailing yield in the Indian debt market. It serves as a reference point for pricing and comparing other debt instruments.
2. Monetary Policy: The Reserve Bank of India (RBI) monitors the 10-year G-Sec yield as an indicator of market interest rates. Changes in the 10-year G-Sec yield can influence the RBI's decisions regarding monetary policy, such as adjusting the repo rate or liquidity measures.
3. Fixed Income Investments: The 10-year G-Sec is commonly used by investors and fund managers as a benchmark for assessing the performance of fixed income investments. It provides a basis for evaluating the yield and risk of other debt instruments, such as corporate bonds and fixed deposits.
4. Bond Pricing and Valuation: The 10-year G-Sec yield serves as a reference rate for pricing and valuing various fixed income securities. It helps determine the discount rate used in the present value calculations of cash flows associated with bonds and other debt instruments.
5. Asset Allocation: The 10-year G-Sec yield is considered by investors and financial advisors while making asset allocation decisions. It provides insights into the risk and return characteristics of fixed income assets compared to other investment options like equities, real estate, or commodities.
6. Risk Management: The 10-year G-Sec is used as a proxy for assessing interest rate risk in bond portfolios and other fixed income investments. Changes in the 10-year G-Sec yield can impact the prices and valuations of various bonds, helping investors manage their exposure to interest rate fluctuations.

It is important to note that the specific uses of the 10-year G-Sec as a proxy may vary depending on the financial institution, market participants, and their investment objectives, however the yield of the 10-year G-Sec remains an important economic indicator to those tracking financial markets. You can even invest in 10-year G-Sec as it is backed by the Government of India with yields at 7.039% (as on 10th June 2023).

Source: thestreet.com, indianretailer.com, worldgovernmentbonds.com

Author: Ashish Joseph George, MMS, CFP. The views shared in this article are my personal views and don’t reflect the views of any organization. This is not an investment advice

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