Market Pulse | Fears Over China Trigger Luxury Sell-Off

Savigny Luxury Index September 2011 | Source: Savigny Partners

LONDON, United Kingdom The seemingly unflappable luxury market continues to waver, with growing worries that China’s booming economy — the driver for much of the rapid growth of luxury brands in the past few years — is beginning to slow down. As a result, every major luxury brand has been hit, and hit hard.

Big news

• Luxury stocks suffered a steep sell-off in the last ten days of September as hedge funds moved out of the sector en masse due to growing concerns over the Chinese economy. The SLI took a real beating losing 13.6 percent over the month of September compared to only 3.8 percent for the benchmark MSCI.

• Prized assets are nevertheless still changing hands, as demonstrated by the recent sale of heritage leather goods brand Delvaux and a healthy interest in Italian tailoring brand Brioni, fronted by PPR.

• Hermès’ plan to create a controlling family holding company was cleared by French market authorities, boosting its defences against LVMH and consequently resulting in its inflated share price easing off.

Going up

• With the whole sector being down, the 1.6 percent drop in the Ralph Lauren share price, perhaps justified by a lower Chinese exposure than its peers, feels like a positive.

Going down

• Much-hyped Prada fell off a cliff, its share price falling by more than 27 percent during September, as much of its IPO valuation rested on the Italian group’s relative under-penetration of the Chinese market compared to other leading luxury brands.

What to watch

• Chinese entrepreneurs starting to feel some pain after years of blue-sky growth will have an impact on prospects for the luxury sector.  It may be that super-highly priced items (luxury cars, complicated watches) get hit disproportionately more than luxury goods such as handbags or designer clothes, which have lower pricepoints.  This would have valuation consequences for the big players in the sector.

Sector Valuation

Pierre Mallevays is a contributing editor at The Business of Fashion and founder and managing partner of Savigny Partners, a corporate advisory firm focusing on the retail and luxury goods industry