As Selling Luxury in China Gets Tougher, Buy American

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Designer brands that are doing brisk business in the US offer a hedge against the risk of slowing growth in a more egalitarian China.

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Any new policy that boosts the purchasing power of a higher number of Chinese households could actually be good for the industry in the long run. According to UBS estimates, the middle class makes up 70% to 80% of all luxury goods purchases in China.

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But past actions have hurt the sector in the short term. When Beijing reined in spending by Chinese government officials as part of an anti-corruption campaign in 2012, growth in sales of private luxury goods globally fell to 2% by 2013, the most in three years. There was one-fifth, leading to the new. Remedy, shows Bain & Company data. Similarly, a 2016 slump in sales hit China’s all-important property market after a crackdown on shadow loans. A renewed effort to curb real-estate investing, which is most visible in the troubles of over-leveraged developer Evergrande, could have a similar effect.

Some brands today are better positioned in the US, however, giving them a hedge if China slows. LVMH Moët Hennessy Louis Vuitton is particularly balanced, with Bernstein’s estimates showing 28% of total sales from American shoppers, versus 27% from Chinese. In the second quarter of this year, the French luxury giant’s sales in the US increased by 31% compared to the same period in pre-pandemic 2019.

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Swiss watch maker Swatch is at the other extreme. The company relies on Chinese consumers for 44% of sales, and generates only 9% from US citizens. Barberry and Herms also rely more heavily on sales to the Chinese than the region average.

Shares of Prada and Gucci owner Kering have sold the most in the past six weeks, down 25% and 18%, respectively. It seems a bit unfair. Granted, Prada’s makeover, which is just starting to show results, needs to keep up with demand from young Chinese consumers if it’s to really catch on. But a jump in US sales at both Prada and Kering, which also owns Bottega Veneta and Yves Saint Laurent, should be reassuring.

Investors have other options if they want to move away from China. Switzerland-based specialist watches retailer does most of its sales in the UK and US and has no operations in Asia. And American brands Capri, Tapestry and Ralph Lauren have more exposure than European players in their emerging home market — more than 50% of sales on average.

Even after the recent recession. Europe’s luxury stocks are looking expensive. They now trade at a nearly 70% premium to the MSCI index as a multiplier of future earnings, which is below its 100%-plus peak in early August but above the 50% historical average, UBS notes. Until there is more certainty about how actions on wealth inequality might affect luxury brands in China, US-focused names provide a safe look.

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