Chinese Luxury Goods Sector
After three years of stringent COVID control measures, China has finally reopened. We expect the wallets of Chinese consumers will do so as well, especially for luxury goods. As restrictions ease and cross-border travel picks up, the re-emergence of Chinese consumers, the largest cohort for spending in the global luxury goods sector is expected to boost demand for high-end clothing, accessories and other items by 20% in 2023. Longer term, Chinese nationals are likely to account for 60% of total spending growth on personal luxury goods through 2030, driven by wealth as well as demographic, social and technological factors. China should become the industry’s growth engine from this year on, and we expect brands at the top of the luxury-goods pyramid to benefit the most.
Stocks of luxury goods companies proved surprisingly resilient last year, as strong demand from high-income consumers and favourable exchange rates helped offset high inflation and rising borrowing costs. And while valuations are back to historical averages, we see China as the most important market for European luxury names, driving more opportunity in the sector in the coming year and longer.
As for the rest of the world, we expect luxury spending in the Middle East to rise in 2023, while South Korea and Japan register single-digit growth. Meanwhile, spending is expected to fall by low single digits in the U.S and Europe. With the ability to resume overseas travel for the first time in three years, Chinese consumers can once again take advantage of cheaper prices in Europe, which can be as much as 30% lower than in China, depending on the brand.
The Chinese government has cut import duties and opened duty-free shopping centers in an attempt to repatriate luxury shoppers. However, the lure of lower prices on the Continent which can be as much as 30% lower than in China along with the “feel-good factor” of, for example, buying an expensive handbag or a weekend in Rome, may prove too strong. The so-called ultra-premiumization of the luxury market may also skew regional shopping trends. Chinese and Korean shoppers are increasingly favoring brands with the highest price points, which they view as status symbols, while cutting spending on the less expensive, more fashion-oriented or “aspirational” brands favoured by Western shoppers.
The expected growth in the Chinese luxury goods sector presents an opportunity for asset management companies to diversify their portfolios and capture potential returns in this segment. With the Middle East also showing an upward trend in luxury spending, Dubai based asset management offices and other asset management services in the region may consider investing in luxury goods companies that have a significant presence in China and the Middle East.
Moreover, as cross-border travel and the global luxury market continue to recover from the pandemic, asset management services in Dubai may need to keep a close eye on the fluctuations in exchange rates and import duties, as well as regional shopping trends, to optimize their investments in the luxury goods sector.
In our opinion the Chinese Luxury Goods Sector can be used for allocation, with China reopening.