Global Chinese consumer leaves no winners in luxury stocks

[MADRID] The rout in European luxury-goods makers is sparing nobody - regardless of how much they sell in China.

Burberry Group and Hugo Boss plunged more than 7 per cent in two days after China devalued its currency, even though the companies have some of the smallest sales exposure to the yuan among luxury makers, according to Credit Suisse Group AG. That's because when taking into account purchases by Chinese travelers abroad, most of the companies are just as reliant on the nation, Sanford C. Bernstein says.

"It's at these times that you understand the extent to which the market of luxury goods is exposed to China and how much it depends on the decisions of the Chinese government," said Mario Ortelli, an analyst at Bernstein in London.

Looking at individual companies' sales in the mainland isn't a reliable gauge to determine which shares are the most at risk. Chinese consumers now do more than half of their spending abroad, according to Bank of America Corp.

Burberry gets 11 per cent of its revenue in yuan, compared with 7 per cent for Hugo Boss, according to estimates by Credit Suisse. Swatch Group AG, which has lost 8.8 per cent in two days, has the biggest exposure, with 23 per cent.

LVMH Moet Hennessy Louis Vuitton and Salvatore Ferragamo sank more than 10 per cent in two days.

Exports to China The Stoxx Europe 600 Index tumbled 2.7 per cent on Wednesday, the most since October and compared with a gain in the Standard & Poor's 500 Index. That's partly because the region sells more to China than the US: The European Union had almost 165 billion euros (S$256 billion) worth of exports to the country last year, compared with US$124 billion for the US to China, according to the European Commission and the US Census Bureau.

For Berenberg Bank, benefits from Chinese travelers' spending on the back of a weak euro will probably offset the effect of the yuan's decline. The potential boost to the Chinese economy from export growth may also increase local demand from Chinese consumers, the Berenberg report said.

Rene Weber, an analyst at Bank Vontobel in Zurich, disagrees, saying burdensome import taxes in China will limit increases in local sales. But the biggest concern for luxury companies is the slowdown of the nation's economy, he said.

"You have a lot of sales in China, and if you see a strong decline in the economy, it becomes an issue for these companies," Mr Weber said. "With a deteriorating economy, people cut spending at home and abroad."

BLOOMBERG