European luxury stocks surge on China's new, far-reaching stimulus package

By Louis Goss

European luxury stocks surged Tuesday as investors bet a major monetary stimulus package announced by the People's Bank of China will revive Chinese demand for expensive handbags and high-fashion clothes.

People's Bank of China governor Pan Gongsheng unveiled the stimulus package at a press conference on Tuesday, during which he announced a 50 basis point interest rate cut and new support for China's housing and equity markets.

See: Doubts linger about a sustained stock market rally after China's big stimulus boost

Luxury fashion brands including Kering (FR:KER) (PPRUY), Burberry (UK:BRBY) (BURBY), Hermès International (FR:RMS) , Compagnie Financière Richemont (CH:CFR), and LVMH Moët Hennessy Louis Vuitton (FR:MC) (LVMHF) were all boosted by news of the central bank's far-reaching stimulus package.

Europe's luxury businesses are heavily reliant on Chinese consumers, who accounted for between 22% and 24% of luxury sales worldwide in 2023, according to a March 2024 report from consultancy firm Bain & Co.

Consumers in China itself accounted for 16% of global luxury sales last year, while Chinese tourists in places including Japan and Singapore accounted for a further 6% to 8% of the luxury fashion industry's worldwide sales, Bain & Co's report says.

Luxury fashion sellers had previously benefited from a surge in spending in the wake of COVID-19, which was fueled by Chinese customers splashing out on expensive goods using money they had saved up during the pandemic.

China's luxury market had previously tripled in size in the five-year period running from 2017 to 2021, fueled by fast-growth in the country's middle class marked by sharp increases in average household wealth and a boom in the number of Chinese millionaires.

The luxury spending splurge later dropped off at the peak of the global pandemic in 2022, before spending started to recover sharply again in 2023 as China eased its heavily-restrictive lockdown measures.

Elsewhere, American consumers had started cutting back on luxury spending in 2023, in a trend that was later followed by Korean, European and Japanese consumers.

Chinese consumers had, meanwhile, continued to spend for longer than those elsewhere, despite the wider downturn in China's economy that was sparked by the ongoing crisis in the country's heavily indebted property sector.

More recently, Europe's top brands have started to suffer from the impacts of China's economic slump, even as weakness in the Japanese yen has driven a tourism boom that has seen an explosion in Chinese tourist spending.

Top firms including Burberry, Hugo Boss (XE:BOSS) (BOSSY), and Gucci-owner Kering have all issued profit warnings this year, on concerns about the slowdown in China's economy. LVMH, which owns top brands including Dior and Bulgari, had previously held out longer than rivals before seeing its Chinese sales drop earlier this year.

In the first half of 2024, LVMH's Asia business excluding Japan business, which accounted for 30% of its overall sales, saw its sales drop 14%. The world's largest luxury company separately achieved "exceptional" 57% growth in its Japanese sales on the back of a boom in sales to Chinese travelers.

The Chinese real estate market crisis was blamed for undermining confidence among consumers, where around 70% of overall household wealth is stored in house values, according to figures from the Cato Institute.

Beijing's recent crackdown on "show-off celebrities" and "wealth flaunting" behaviors on social media platforms including WeChat also threaten to hit demand for luxury goods among Chinese consumers.

Now, investors are hoping the People's Bank of China's new stimulus measure will help boost Chinese spending on luxury goods, in working to restore consumer confidence and revive wider spending on expensive handbags and clothes.

-Louis Goss

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09-24-24 0557ET

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