LONDON – The latest U.K. terrorist attack, the third in four months, will further dampen demand from the Chinese luxury consumer, according to Luca Solca, managing partner at Exane BNP Paribas.
In a flash report issued in the wake of the Saturday night attack that left seven people dead and 48 injured in central London, Solca said Chinese demand was already waning.
“Several data points indicate that the Chinese macroeconomic peak may be behind us. In this context, terrorist attacks in Europe may accelerate spend and growth normalization,” he said.
This is dismal news for luxury goods companies, as the most recent rebound in luxury spending had been driven largely by Chinese consumers returning to the sector, said Solca. “The very bulk of recently reported growth comes from Chinese nationals spending more money on luxury.”
He said it would be wise for investors to “de-risk” their luxury portfolios by “one” notch, reduce their exposure to midcap fashion and luxury companies and stick instead to “high-quality” names, such as LVMH Moët Hennessy Louis Vuitton, or strong “positive momentum” ones such as Kering.
Solca also said to beware of hard luxury. Swatch may see a rebound, but it will be too late, he said, adding he’s also dubious about a “V-shaped rebound” for Compagnie Financière Richemont in the stores that sell its watches, a segment of the market that has been shrinking. Exane recently downgraded Richemont’s stock.
Barclays, by contrast, is bullish on the Chinese consumer. According to a report issued Monday, the British bank sees “very strong growth” in Mainland luxury shopping malls, with operators notching 30 to 40 percent uptick against tough comparisons.
It also said that Chinese consumers remain strong internationally and the fear of traveling to areas affected by geopolitical events is moderating, with value for money a key feature.
Growth, it said, is coming from younger customers and women. “This makes the more fashion-focused and niche brands increasingly popular, with Gucci Dionysus and the new Jeff Koons LV collaboration very prominent in the malls.”
Another big driver behind domestic spending is the fact that Chinese customs has raised personal goods taxes in order to reduce incentives to buy abroad.
Barclays said all categories are doing well, although the market has become very brand-focused. In soft luxury, Gucci is clearly a very strong performer with Vuitton doing well, while in hard luxury Rolex and Patek Philippe are the best performers. “Hong Kong also appears to have troughed and stabilized.”
Barclays said that, overall, its preferred stock remains Kering, “as we remain confident on the sustainability of the Gucci momentum.”
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