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|08 February, 2019

China bling scare was healthy reality check

Fears of a slump in Chinese demand that battered shares in luxury groups last year has proven misplaced

An investor checks stock information on her mobile phone in front of a board at a brokerage office in Beijing, China July 6, 2018. Image for illustrative purposes only.

An investor checks stock information on her mobile phone in front of a board at a brokerage office in Beijing, China July 6, 2018. Image for illustrative purposes only.

REUTERS/Jason Lee

The China bling scare is over. Hermes on Friday became the latest luxury group to report strong growth momentum in the Middle Kingdom in the final quarter of 2018, echoing upbeat noises from rival LVMH. Fears of a slump in Chinese demand that battered shares in luxury groups last year has proven misplaced. Yet the selloff was probably healthy.

The maker of the Birkin handbag said sales rose 10 percent to 1.7 billion euros in the fourth quarter, helped by strong demand in the People’s Republic. It’s true that the Chinese economy is slowing. But a previous drop in demand for luxury goods in 2015 and 2016 was partly the result of buyers avoiding ostentatious purchases following President Xi Jinping’s anti-corruption drive. There is no such crackdown today.

Purveyors of expensive jewellery, handbags and watches have good reason to worry about the health of the world’s second-largest economy. Purchases by Chinese shoppers, whether on the mainland or abroad, represent about a third of total luxury sales. The spending power of Chinese tourists has suffered from a weaker yuan. And social unrest in France may have discouraged some travellers, as Richemont and Swatch have suggested.

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The good news, though, is that Chinese buyers are spending more at home. As recently as 2015, Chinese bought just 20 percent of pricey goods on the mainland, according to Equita. This is predicted to rise to 50 percent, according to Italian luxury industry association Altagamma.

The China scare was one of the main factors for the selloff in luxury stocks from October last year. But political uncertainty in Europe and concern about international trade also played a part in dragging down equity values.

Moreover, shares of luxury goods companies were probably too expensive. By mid-2018, the shares of top European players were trading at more than 26 times expected earnings, according to weighted average estimates compiled by Breakingviews. Big players such as LVMH and Kering PRTP.PA are now valued at less than 21 times, the sector average for the last five years. The China scare may have been overdone, but a correction was overdue.

CONTEXT NEWS

- French luxury goods group Hermes on Feb. 8 reported fourth-quarter revenues of 1.7 billion euros, up 9.6 percent at constant exchange rates. Sales in 2018 amounted to 6 billion euros, up 10 percent at constant exchange rates.

- LVMH on Jan. 29 said its sales had picked up in China in the fourth quarter.

- Hermes Chief Executive Axel Dumas said the company was still growing in Asia and did not see any change in momentum in its stores in China.

© Reuters News 2019

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