China is pulling down luxury goods stocks

Shares of luxury goods companies such as LVMH, Hermes and Prada are as popular as their products. The last two weeks have brought them significant drops amid concerns about the situation in China, which account for 35 percent. global industry turnover.

About the author

Pawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.

China is the largest market for luxury goods

President of China on August 17 Xi Jinping called during a meeting of one of the bodies of the Chinese Communist Party for regulation "Excessively high income" and to build fairer prosperity. So far, no new regulations have been introduced, but it is speculated that there may be an increase in taxation and stricter customs control of luxury products. The changes may also affect online advertising and very popular Chinese influencers who support luxury brands. This event immediately plunged the stocks of major luxury goods companies as virtually all are present and active in the market. China is currently the largest market for such goods - in 2019, China's share of the global luxury goods market was 35%. (for comparison, the share of the USA is 22%, and of Europe - 17%). It is estimated that by 2025 the share of China may increase to almost 50%, with a simultaneous decline in the share of the USA and Europe.

Stock market reaction

Announcements have triggered almost 12 percent. fall in stock prices LVMH Moet Hennessy Louis Vuitton, the French giant of luxury goods. Currently, LVMH has already recovered some of the decline from August 17, but still remains below mid-August levels. However, in the longer term, the company's shares perform very well, since the beginning of the year they have increased by 25,58%, and in the last 12 months by 58,18%.

At the end of July, the company presented very good results for the first half of 2021, achieving record revenues of EUR 28,7 billion. It is 56 percent. more than in the pandemic 2020, but above all 11 percent. more than in 2019. Operating profit increased by 44 percent. compared to 2019 and amounted to EUR 7,6 billion. Good results were achieved despite the continued lockdowns and the fact that many LVMH stores remained closed. The biggest increase by 74 percent. compared to 2019, it was recorded in the department of Fashion and leather products, by 20 percent. the category of wines and spirits has increased. Profits in the Perfume and Cosmetics division remained at a similar level. Tiffany & Co. also performed well. (acquired by LVMH in January 2021 for $ 15,8 billion).

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About 13 percent as a result of the announcement of August 17, the share prices of the French holding company Kering, the owner of, among others, brands such as Gucci, Yves Saint Laurent and Balenciaga. They are also slowly catching up. Since the beginning of the year, Kering shares have increased by 19,73 percent, and in the last 12 months by 25,21 percent. The company's revenues for the first half of 2021 were 8,4 percent. higher than in 2019. Capri Holding, the owner of the Michael Kors and Versace brands, has already made up for the losses from the last two weeks. Its shares have increased by 40,18 percent since the beginning of the year, and in the last 12 months by a spectacular 249,72 percent.

If these changes go into effect, it could result in a reduction in sales of luxury goods in China. This may have a negative impact on the share prices of companies in this sector in the coming months. However, the prospects for the industry as a whole appear favorable. Most of the big companies have already recovered from the pandemic and continue to grow on the wave of consumption caused by the demand that was held back by the time of the lockdowns. The trend we are seeing is progressive consolidation - the pandemic has strengthened the biggest players while weakening some medium and smaller brands. In the coming months we will see what the announcements of August 17 mean in practice. However, it seems that the growth of the luxury industry will continue.