Luxury stocks ‘bask in the glow’ of a Chinese equity stimulus

Luxury investors breathed a sigh of relief this morning after the People’s Bank of China announced an array of economy-boosting policies, including £84bn of liquidity support for equities.

High-end European stocks were a sea of green, with French luxury fashion house LVMH up 4.2 per cent, Hermes up 4.3 per cent and Kering up 4.3 per cent.

In some rare good news for British luxury brand Burberry as its stock price rose by nearly five per cent in early trades, although it pared back some of its gains later in the day.

Burberry has been one of the worst-performing stocks on the London stock exchange in the last year, and recently slipped out of the FTSE 100 after its share price dropped nearly 75 per cent in 16 months.

Burberry has partially blamed its performance on weak demand from China, which has been one of two bad headaches for the luxury sector over the last year – the other has been the cost-of-living crisis in Europe.

The luxury rout has wiped almost £150bn of the sector’s value in the second quarter alone, according to Bain.

Stimulus could ‘unleash the power of the Chinese consumer’ to boost luxury market

The sharp rally in stock markets is a good indicator that investors believe the measures will have a genuinely positive impact on Chinese economic growth, which has disappointed expectations this year.

The package could “unleash the power of the Chinese consumer” which would provide a longer-term rally for French luxury and consumer goods, which are already “basking in a Beijing glow”, research director at XTB Kathleen Brooks said.

“[The news] could transform the fortunes of European equities”, analysts said, adding that the news will “give European shares more of a boost than rising expectations of an October rate cut from the ECB,” Brooks added.

Swatch Group, Burberry and Richemont were the luxury firms most exposed to the Chinese market and should therefore benefit the most, RBC analyst Piral Dadhania explained.

“We believe we are getting closer to the bottom of the luxury cycle, which could happen in the next three to six months, likely the end of 2024 or into early 2025, based on our current expectations, and assuming no material worsening of China luxury demand trends,”Dadhania said.

“We note light investor positioning in European Luxury stocks and have been fielding a number of queries from long-only investors starting to turn less negative in recent weeks,” she added.

A word of caution

Some analysts were more cautious about the stimulus, and said that the Chinese economy still had structural issues holding back growth.

“This is a step in the right direction,” Julian Evans-Pritchard, head of China Economics at Capital Economics said. “But it will probably be insufficient to drive a turnaround in growth unless followed up with greater fiscal support.”

RBC analysts added: “The economy continues to suffer from a property crisis with deteriorating new home prices, soft consumer confidence, a deflationary economy, PMIs pointing to contraction and subdued spending.”