China's Economic Growth is Sufficient to Boost Luxury Stocks

Chinese consumers already make up 30% of global luxury goods purchases, meaning that despite the slower economy the growth of wealthy consumers offer great potential

Paul Swinand 8 December, 2015 | 7:41AM

Macroeconomic worries in China have are at the forefront of investors’ minds. Many luxury stocks have experienced share price volatility and have traded at discounts to Morningstar equity analysts’ fair value estimates this year. Negative data points ranging from the greater than 40% drop in the Shanghai composite stock index this past summer to the sudden devaluation of the yuan have added to investor worries over companies' prospects for selling goods to China. Luxury goods companies have seen further headwinds from Hong Kong and Macau traffic declines.

Chinese Economic Growth Forecast at Lower Rate

Using available macroeconomic data to corroborate official state GDP growth rates, Morningstar's own economic research suggests that although GDP is probably overstated, the deceleration of the growth rate has stabilised. We forecast economic growth will annualise at around 5% by the end of 2015 with slowing investment but 7% consumption growth. This is slightly ahead of our estimate that real growth is currently around 4.5%.

Current macroeconomic indicators suggest that policy decisions taken earlier in the year, such as lowering interest rates, cutting luxury taxes, and the liberalization of the currency, may be starting to have an impact.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Burberry Group PLC1,395.90 GBX-1.80
Cie Financiere Richemont SA59.56 CHF-0.80
LVMH Moet Hennessy Louis Vuitton SE386.35 EUR-1.24
Tapestry Inc15.43 USD-1.09
The Swatch Group AG Bearer Shares201.30 CHF-1.18

About Author

Paul Swinand  is an equity analyst at Morningstar covering department stores, luxury goods, sporting goods, apparel and footwear.

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