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China’s surprise 2 percent currency devaluation earlier this week had luxury investors panicking, but calming markets demonstrate that their rapid sell-offs represented fear of a worst-case scenario rather than a prediction of what’s actually to come.
After most major global luxury companies (LVMH, Kering, Richemont, Swatch, and many more) saw significant drops in stock prices as a result of the devaluation announcement on Tuesday—with those seeing the largest portion of their business in China being hit the hardest—their shares have already begun to rally after reassurances from the People’s Bank of China that the yuan would not fall further and a statement that it would intervene before an extreme swing could happen.
While the currency devaluation could hurt luxury profits by affecting renminbi-euro currency translation and altering the budgets of Chinese tourist-shoppers chasing a weak euro, investors’ frenzy to sell their luxury shares was based mostly on a fear that the currency would drop even lower. After the yuan strengthened by .05 percent on Friday, the panic appears to have abated for now. Equity and derivatives strategist from BNP Paribas Ankit Gheedia told Reuters that during the initial panicked sell-offs, “the market was pricing a big collapse of China as an economy,” while other experts predicted that the yuan value would have to decline by 20 percent to have a significant impact on luxury brands’ financial results.
While the 2 percent devaluation is predicted to have a “low-single-digit” impact on luxury profits, the status quo currently remains the same in terms of one of the main factors driving consumer behavior and the booming gray market: prices on the mainland are still significantly higher than in other luxury shopping destinations such as Europe, Japan, and North America. Luxury brands need to make strategic, informed, and careful decisions on pricing policies that take into account both currency fluctuations and Chinese consumer demand in this complicated global landscape.