Daily Management Review

European Luxury Stocks' Post Covid-19 Boom Threatened By China Wealth Plans


Many investors are still hesitant about purchasing stocks after the sharp August sell-off, as China's slowing economic recovery and plans for redistribution of wealth threaten to disrupt Europe's luxury sector.
According to UBS analysts, the main driver of the sector is demand for high-end goods in the most populous country in the world. This account accounts for a third and 28per cent respectively of European luxury goods manufacturers' sales in 2019.
After Chinese President Xi Jinping announced plans for "common prosperity", the sector saw $120 billion disappear, including Louis Vuitton's owner LVMH, Burberry and Gucci owner Kering.
Analysts used the slide to suggest investors bet on luxury stocks' heady recovery from COVID-19. This saw the European sector, rise 140 per cent between March 2020 and its Aug. 12 peak.
The sector's recovery from August lows was halted by Chinese economic data and supply chain issues, partly caused by new coronavirus epidemics. This triggered a second selloff. Continue reading
UBS reports that the luxury sector's value premium has dropped 30 per cent to 74 per cent in a month, compared to its August peak. This is compared to the wider MSCI Europe index.
Analysts warn that Hermes, which sells Birkin handbags for $10,000+ and has waiting lists, could lose their appeal if China continues to push its tax on the wealthy and pursues a campaign against tax avoidance.
According to Thomas Chauvet of Citi's luxury goods equity research, high-end sales could be affected "if higher taxes are introduced on income, wealth or consumption", Thomas Chauvet, Citi's head of luxury goods equity Research in London.
According to Jon Cox, head European Consumer Equities at Kepler Cheuvreux, Chinese consumers may be "reluctant" to purchase luxury goods if they fear the taxman will come to them. "This will probably have a negative effect on the performance of some companies."
Kepler predicted that higher taxes for the wealthy could cause a drop in sales of 10 to 25per cent in China. This would hit global luxury demand which is unlikely to be offset elsewhere. Kepler said that this could cause sector stagnation over the next one to two year.
Others are more cautiously optimistic.
Portfolio manager at Fidelity International Aneta Wynimko stated that her fund still believes in European luxury companies, but is closely monitoring developments in China because they are "difficult to predict" as recent events have shown.
"We are aware of a potential change in sentiment of consumers towards luxury segment," she stated. Fidelity isn't too concerned about a spending power crunch, since it appears that the regulation being announced supports middle-class growth.
Barclays elevated the sector to overweight citing recent sharp underperformance.
UBS stated that the de-rating is a sign that China's short-term uncertainty has been priced into. It said there is "good buying opportunity" for quality names, including Richemont, which shares fell 9per cent from its August peak.
Historically, due to potential concerns about a Chinese slowdown the sector was de-rated against the MSCI Europe Index by an average of 15-30 percentage points, according to UBS analysts.
They anticipate that China's tax adjustments will be "modest, gradual", which will limit any potential negative effects on the sector.