What Happened: Luxury conglomerates LVMH and Kering SA have been benefiting from strong Chinese consumer spending. The two rivals have become the European stock market’s “new champion for market capitalization,” said Christophe Roulet, editor-in-chief at HH Journal.
Giles Rothbarth, manager of the Blackrock European Dynamic Fund, made a similar appraisal when he assessed the earning potential of luxury-goods stocks. “We view European luxury companies as the European stock market equivalent of US tech,” he said, “businesses that are unrivaled in their global dominance.”
Investor optimism is fueling this luxury stock surge. But some financial analysts recommend taking a cautious approach to “lofty valuations.”
Jing Take: No doubt, excessive optimism is dangerous because it creates speculative stock market bubbles. Some luxury stocks like LVMH and Hermès certainly have long-term potential, as they continually boast solid earnings growth. But their dependence on China could create a longstanding vulnerability.
We’ve seen the outcome of this excessive reliance on China during the global COVID-19 pandemic. Yet even the short-lived phenomenon of “revenge buying” didn’t offset the global drop in sales. And as China’s economic growth slips and young Chinese citizens start to feel hopeless because of the rising costs of living, they might decide to rein in their luxury spending.
The South China Morning Post reports that China’s housing price-to-income ratio reached a 20-year high of 9.2 in 2020, and food prices increased by 1.2 percent. Moreover, the cost of fresh meat rose by 7.1 percent, and the price of pork increased by 49.7 percent, according to the National Bureau of Statistics (NBS).
As such, inflation and the growing housing crisis have boosted income inequality and impacted homeownership and consumer spending. Therefore, if the government doesn’t address these underlying problems soon, the luxury industry might become China’s next casualty.
The Jing Take reports on a piece of the leading news and presents our editorial team’s analysis of the key implications for the luxury industry. In the recurring column, we analyze everything from product drops and mergers to heated debate sprouting on Chinese social media.