Chinese consumers have long pushed luxury brands to new heights. But with China’s economic slump and questions surrounding changing consumer tastes, analysts are unsure whether these shoppers will be able to pull the luxury sector out of the doldrums. The Chinese government’s new stimulus package, announced in late September, has reignited interest in the country’s economic outlook and raised hopes of a revival in luxury spending among this important segment. But analysts say such measures may not be targeting the consumers the industry relies on most. Even so, preference for luxury labels may have evaporated as consumers turn to more familiar brands. “Personally, I don’t think the Chinese have the same level of aspirational spending that they do,” said Ben Harburg, portfolio manager at Core Values Alpha. “Wool has disappeared from the public eye. Even with increased discretionary income, it may not come back into the market historically.” According to Morgan Stanley, about 3% of luxury companies’ sales Chinese people accounted for more than 50% of the sector’s growth from 2003 to 2019. Ashley Wallace, an analyst at Bank of America, said the decade from 2002 to 2012 saw a surge in demand for luxury goods in China, which could be defined as the “China luxury goods boom.” Ta. A post-pandemic spending surge drove luxury stocks like LVMH to all-time highs in early 2023, but things quickly changed. Wallace said China is currently experiencing “the worst cycle of consumer weakness since China joined the WTO in 2001”, with demand shocks and deflation weighing on the economy. LVMH Chief Financial Officer Jean-Jacques Guiony said in the company’s July quarter results conference on Tuesday: “Consumer confidence in mainland China today has returned to its lowest level ever recorded during the COVID-19 pandemic. “There is,” he said. The company reported a 3% decline in organic growth in the third quarter. Sector-wide margin pressures and slowing revenue growth in the broader luxury goods sector are likely to continue next year as Chinese consumer sentiment remains weak, BofA forecasts. “The slowdown in consumption only became apparent in the third quarter of 2024,” Wallace said. “We believe confidence and sentiment will need to improve to meet China’s 2025 luxury growth forecast of flat year-on-year growth. ” Luxury stocks are feeling the pressure, with U.S.-traded shares of giants LVMH and Kering down about 17% and 41%, respectively, since the start of the year. Moncler fell 2.3%. Traditionally a defensive stock, Hermès has risen 7% since the beginning of the year, but remains well behind the S&P 500’s 23% rise. Prada has bucked the trend, rising 24%, while Richemont is up nearly 7% since the beginning of the year. LVMUY CFRUY,.SPX YTD Mountain 2024 LVMH and Richemont US-Traded Stocks Against S&P 500 ‘Wall of Money’ Recent stimulus developments in China include financial support for real estate, lower interest rates, and changes in real estate purchase rules. The easing has sent Chinese stocks on a roller coaster ride. But it wasn’t just Chinese companies that experienced the initial surge. Luxury stocks also rose 16% in the first few days on stimulus news, according to Bank of America. However, subsequent announcements by Chinese government officials disappointed investors and triggered a sharp decline in mainland Chinese markets, with luxury goods stocks also falling. Indeed, additional real estate sector measures have since been announced, as well as fiscal stimulus, stimulating more investment and consumption. Analysts and investors are divided on whether China’s economic stimulus can revive growth in consumer luxury spending and whether it will provide meaningful tailwinds for luxury goods companies. are. Policies such as lowering bank deposit rates could spur more spending. The average savings rate for Chinese consumers tends to be much higher at 31%, compared to only about 4% in the United States. This means there is approximately $21 trillion in household savings, meaning there is still room for savings in the luxury sector over the long term. Penetration and growth in China. Morgan Stanley analyst Edouard Aubin wrote in a note to clients on Sept. 12 that a “Great Wall of Money” development could be triggered. But some investors are more skeptical about the stimulus’s actual impact on luxury goods. “Improving stock markets, real estate and the economic outlook could indirectly support consumer confidence, which could be positive for luxury goods. Fiscal support will target luxury customers,” Wallace said. I don’t expect that to happen.” Return to “bull frenzy”? It’s not just the economic overhang that could reduce Chinese consumers’ spending on luxury goods. Consumer preferences and habits have changed over the years. Core Values’ Harburg said the real estate sector’s woes and the stock market downturn prompted households to start saving, starting “a consumption downgrade story in which Chinese consumers turned to domestic brands.” Consumers have begun to engage in “import substitution,” purchasing domestic substitutes for foreign brands in areas such as clothing, cosmetics, and automobiles. Lines at luxury stores in China’s shopping malls are no longer as long as they were before the pandemic, he added. Mr. Harburg’s fund is a long-term holding, but he said these changes in consumer behavior in China will hopefully leave luxury goods giants short of cash. The Chinese government’s crackdown on corruption targeting senior officials and the wealthy has reduced ostentatious displays of wealth. This created a trickle-down trend where the upper and middle classes no longer had the same demand for luxury goods and status markers. “You don’t want Sauron’s eyes on you,” Harburg said. “Chinese consumers are generally cautious and conservative. Because of the uncertainty, they don’t have the bullish enthusiasm to go out and spend money irrationally or emotionally.” Even if consumer spending is not as strong, questions remain as to whether the luxury goods sector can continue to grow at the same level. Luxury brands will have to rely more on the smaller luxury market, which is likely to lead to lower profit margins in this sector. LVMH’s Guiony said: “It’s normal for people to wonder if this is completely structural and we’ll never go back to exactly the same situation. Probably.” “But we are very hopeful that the luxury goods industry will continue to grow and ride the wave of the rise of the upper middle class, as it has for the past 55 years.”
