LVMH shares to record low since May 500.
Stocks valuation premium decreases to 30 pp to 74% from August peak.
One billion dollars destroyed from the ECB in two days.
LONDON, Sep 20 Reuters - China's stuttering recovery and plans to redistribute wealth threaten to derail Europe's booming luxury sector, leaving many investors apprehensive about buying the stocks even after their sharp August sell-off.
Demand for high-end products in the world's most populous nation is the main driver for the sector, accounting for a third of the European luxury goods manufacturers' sales in 2019 and 28% in 2020, according to UBS analysts.
Around $120 billion was wiped from the sector, including Chanel's owner LVMH, Burberry, and Gucci owner Kering in only two days last month after Chinese President Xi Jinping unveiled plans for common prosperity Several analysts used the slide to recommend investors bet that Luxury stocks' heady resurgence from COVID - 19, which saw the EU sector rise 140% from March 2020 to its Aug. 12 peak, would resume
However, Chinese data and supply chain problems caused, in part, by new local coronavirus outbreaks triggered the sector's rebound from August lows, triggering a second sell-off.
In just one month, the investment sector's premium has fallen 30 percentage points to 74% from its August peak compared with the broader MSCI Europe index according to UBS.
Some analysts warn that the appeal of companies such as Hermes, whose Birkin handbags sell for $10,000 + and often have waiting lists, will take a serious hit if China pushes on with its plan to tax the rich and implement a campaign against tax avoidance.
High-end sales could be hit if higher taxes were introduced on income, wealth, property or consumption said Thomas Chauvet, head of luxury goods research at Citi in London.
Chinese consumers can become reluctant to buy luxurious goods if they worry about the taxman coming to see them said Jon Cox, head of European Consumer Equities at Kepler Cheuvreux. This is probably going to have a negative impact on performance of some of these companies. Kepler estimated higher taxes for the rich could lead to a decline of between 10 to 25 percent in sales in China, hitting global luxury demand, which is unlikely to be offset elsewhere. That could lead to sector stagnation for one to two years, Kepler said.
Aneta Wynimko, Portfolio Manager at Fidelity International, said her fund maintains conviction in middle class luxury companies but is closely monitoring developments in China as they are difficult to predict as many recent events have shown We are mindful of a possible change of sentiment of consumers towards the luxury segment, she said, adding that Fidelity is not too worried about a spending power crash as it seems the regulation being announced supports all European luxury companies.
Barclays upgraded the sector to overweight, citing recent sharp underperformance.
UBS said the heavy de-rating implies that short-term China uncertainty has been priced in. There is a good buying opportunity for high quality names it said, citing Richemont whose shares were down 9% since its August peak.
Historically, on the back of potential concerns about a Chinese slowdown, the sector in line with the recent de-triggering of the MSCI Europe Index scored between 15 and 30 percentage points in line with the current repricing by UBS analysts.
They expect China's tax adjustments to be gradual and modest limiting an imminent negative impact on the sector.