Barclays Cuts Luxury Sector to Neutral as China Recovery Stalls

The Chinese luxury market is facing a reality check. With gloomy economic outlooks ahead, even elite spenders are beginning to take a cautious stance.

In a recent report Barclays lowered guidance for LVMH Moët Hennessy Louis Vuitton, which it viewed “as a proxy for the sector,” from overweight to equal weight. In the same report, Barclays cut outlooks for the luxury sector from “positive” to “neutral.”

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In a seperate research note, Deutsche Bank lowered the consumer products segment to underweight due to luxury companies’ exposure to the Chinese market.

“The luxury goods sector has been going through a severe de-rating over the past month, which we think reflects the deteriorating macro indicators coming from China and the gradual return to more normalized growth,” wrote Barclays in the report, titled “Adjusting to a new normal.”

However, Barclays maintained an overweight rating for both Hermès and Moncler.

“We think that Hermès is still likely to do better than peers thanks to its supply constraint business model and its over-indexation to VVICs,” explained the report. “Moncler has one of the highest price gaps between China and Europe, as such we would expect them to take market share as Chinese tourists return to Europe.”

On the macro front, China’s ongoing crackdown on the real estate and health care sectors also means that affluent shoppers are less keen on flaunting their wealth. “As sentiment worsens, a second-derivative risk, we think, is that wealthy consumers may choose to stay away from wearing luxury to ‘not stand out,'” the report explained.

But “deep-wallet VVICs continue to spend more both in mainland China and overseas,” Barclays added. “And as such, competition for the more resilient, high-spending customers has also intensified.”

Taking a cautious, not yet austere take on the immediate future, Barclays said that further down the road, China’s long-term growth outlooks remains resilient.

“The industry has already proven its ability to navigate difficult periods, such as the global financial crisis, the China anti-gifting crackdown, COVID-19, and we think this time is no different,” wrote Barclays.

Barclays reasoned that despite a shrinking population, the sector will stand to benefit from the expansion of China’s middle class, currently the largest in the world.

“We also note that trends of delayed marriage and delayed parenthood could lead to lower financial burdens from parenting and thus to more self-reward and to a higher level of spending on luxury goods,” the report said on the cohort’s evolving traits.

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