China rebound set to boost value of luxury retail stocks

China’s supportive policies and improving economic data in Europe will boost European luxury companies, Barclays says, raising its rating on the sector to “overweight”.

After a post-pandemic splurge that fuelled robust sales growth for high-end fashion companies over two years, consumers have been reining back purchases, particularly younger, less wealthy clientele that are more vulnerable to rising inflation.

China, a major hub for luxury goods, had a troubled 2023, but a string of supportive policies by Beijing in recent days including a deep cut to bank reserves has shored up investor confidence for revival in the world’s second-largest economy.

“While we still do not expect a large-scale stimulus package…(we) believe that selective China exposure via European companies offers a positive asymmetry if activity were to show more signs of stabilisation,” and if more policy support is rolled out, Barclays strategists said in a note.

Business activity in the euro zone improved this month compared to December, according to preliminary data, while the European Central Bank held interest rates unchanged on Thursday even as the narrative of lower borrowing costs from major central banks entered the global stage.

The brokerage added it expects the global diversification of luxury goods companies and their increasing exposure to the US market to provide a ‘good balance’ against their presence in China.

LVMH, which is considered a bellwether for the wider luxury industry, posted a 10 per cent rise in fourth-quarter sales on Thursday, driven by resilient demand – including from Chinese buyers.

European and UK markets also rose on Friday, boosted broadly by luxury stocks after LVMH’s robust results, while a gauge of top European luxury goods stocks also climbed. [.EU][.L]

Barclays also downgraded the European Utilities sector to “marketweight” citing risks to the sector from a sharp fall in natural gas prices.

  • Reporting by Priyadarshini Basu and Siddarth S in Bengaluru; Editing by Janane Venkatraman, of Reuters.

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