The Chinese government is continuing to tighten regulations across several growth sectors, including technology and entertainment. Its latest target could indirectly be luxury stocks after president Xi Jinping announced plans to redistribute wealth in the country. Will Jinping’s crackdown on wealth inhibit spending on the high-end goods these retailers produce, or could this form of spreading wealth in China be good news for luxury companies? What’s the potential impact on the share prices of well-known French luxury stocks LVMH [MC.PA], Hermès [RMS.PA] and Kering [KER.PA]?
LVMH share price dips amid China crackdown
The LVMH share price’s almost relentless upward trajectory has been interrupted since the Louis Vuitton and Dior owner’s stock hit an all-time high at €716.60 on 13 August.
Since that peak, LVMH’s share price has slipped 13.05% to €623.10 at the close on 27 August. However, as of 30 August, the luxury stock is still up an attractive 60.8% in the past 12 months and 23.1% in the year to date.
Hermes share price slides from all-time high
The Hermès share price has followed a similar pattern to its peer, though with an even more impressive jump of 73.9% across the previous 12 months (through 30 August), while its year-to-date rise of 42.3% is almost double that of LVMH.
Hermès’ share price also reached an all-time high on 13 August of €1,354.50 and has since dropped 8.38% to €1,241.00 on 27 August.
Kering share price drops from new peak
With famous brands including Gucci and Saint Lauren, Kering’s share price has also followed a similar path to its peers. The stock has risen 31.7% over the last 12 months and has a year-to-date increase of 14.4%, as of 30 August.
In the past month though, the shares have fallen 11.2% overall, with the stock sliding 15.8% from its own all-time high at €798.00, also recorded on 13 August.
Will Beijing’s wealth crackdown hit luxury stocks?
On 17 August, president Jinping’s government announced plans to expand the country’s middle-income groups and increase the earnings of the poorest ones, while regulating those of the richest, in an overall aim for “common prosperity”.
“The gap between rich and poor has grown significantly... Beijing has indicated it doesn’t intend to let it widen indefinitely and is said to be considering policies such as new taxes on property and inheritance,” Quartz’s fashion reporter Marc Bain wrote. Investors are concerned that the policies will reduce sales, as China is a huge market for luxury stocks, which rely on Chinese shoppers for a large slice of their sales.
China’s government had previously undertaken an anti-corruption crackdown between 2012 and 2014 that targeted the exchange of lavish gifts saw Swiss watch sales plunge, reports Bain. A note from investment bank UBS said: “A slowdown among the sector’s largest nationality would likely have a negative impact on sales and as such the development of the situation is likely to be carefully watched by the market.”
Could Beijing’s wealth redistribution plans boost the sector?
It’s not all doom and gloom for these luxury retailers though, with much of the sales growth in China driven by “the country’s rapidly expanding middle class”, says Bain, who suggest that this transition, already underway, “should help insulate luxury businesses from political moves targeting the wealthiest Chinese”. Higher earnings among a growing number of middle-income families should translate into more disposable income, which – while perhaps still not stretching to the most expensive luxury products on offer – could boost sales among the range of slightly more affordable goods.
There is no guarantee how successful China’s redistribution plans will turn out to be. “It wouldn’t be the first time a communist party chief failed to redistribute wealth”, reported Reuters last week. There’s little doubt about China’s importance to the luxury market and in turn, the share prices of LVMH, Hermès, Kering and the rest of the sector. According to Euromonitor, China will represent some 40% of global luxury demand in 2021.
What’s next for these luxury stocks?
Analysts covering LVMH have a consensus price target of €708.45, giving LVMH’s share price a potential upside of 13.70% from its 27 August close of €623.10. According to MarketBeat, the 11 analysts covering the stock have nine buy and two hold ratings for a consensus buy.
Hermès has an average price target of €1,185.81, according to the Wall Street Journal, suggesting the stock’s share price has a potential downside of 4.45% compared with its 27 August close of €1,241.00. Out of the 21 analysts covering the stock on The Wall Street Journal, four rate it a buy, one overweight, 13 holds and three sells, for an overall hold rating on Hermès.
Kering has an average price target of €816.14, according to the same publication, representing a potential upside of 22.11% from 27 August close of €668.60. And with 17 buys, one overweight, seven holds, two underweight and one sell rating, Kering’s share price has a positive consensus overweight rating.
These luxury stocks have a mixed overall rating among analysts covering them, and all three have slipped back after recently making all-time highs, following the news from China which has dented investor confidence. However, the potential political interference may yet offer a silver lining to the sector.