Luxury market too dependent on China

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China, the second largest market in the luxury industry, worries industry players. The country’s economic dynamics have been less good since the upsurge in the number of Covid-19 cases. In addition, Xi Jinping’s declaration calling for a better redistribution of wealth by limiting the “unreasonable income” of the better-off is fueling the fear of investors.

The slowdown in the Chinese economy worries the luxury industry. The economic giant, the second most important market for the luxury industry, is facing an upsurge in contamination with the Delta variant in certain regions. As a result, luxury is suffering from the downturn in Chinese activity, proven by several indicators: consumption, industrial production and exports. On the other hand, according to Chinese media, China is considering a plan to redistribute wealth with a possible increase in taxes on the richest, the first consumers of luxury products.

The values of luxury, which have floundered since the start of the week, continue to suffer on Thursday. Since the beginning of the month, the LVMH share has lost more than 10% to 616.60 euros this Thursday late afternoon against 687 euros two weeks ago, and that of Kering nearly 15%, reaching 651 , 80 euros against 774.50 euros on August 2. This fall in the luxury industry weighed down the entire Parisian quotation, which lost more than 2%, due to their weighting in the index.

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“Concerns about a potential slowdown in China have increased in recent days” and “investors will assess what impact this could have on the European luxury sector”, according to a note from UBS which recalls that Chinese consumption counted for 35% of luxury product sales in 2019 before the Covid-19 crisis. Last year, demand fell but China still accounted for 28% of luxury consumption worldwide.

On the other hand, the Chinese president said he wanted to limit “unreasonable income” and develop the middle class, according to the minutes of a meeting of the Central Committee for Financial and Economic Affairs of the Communist Party held on Tuesday. This concern for social equity also worries the markets.

This government announcement in favor of redistribution is indeed one of the factors fueling fears.

Still, even though luxury stocks have been roughed up in recent days, losses remain negligible compared to gains made since the start of the year, as luxury has more than recovered to pre-crisis levels.

The sector quickly recovered from the shock of the pandemic this year. The world leader in luxury thus saw its net profit increased tenfold in the first half of the year compared to the same period in 2020, to reach 5.3 billion euros. It is also an increase of 62% compared to 2019, before the Covid-19 pandemic. Sales were particularly driven by strong growth in China and the United States. For its part, the Hermès group has also seen its sales increase. They reached 2.1 billion euros in the first quarter, or 38% more compared to 2020, marked by the start of the pandemic, and even exceeding their level before the Covid-19 crisis.

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