The end of the road for luxury goods

Who’d be a corrupt Chinese official these days? We’ve written before about our suspicion that the new government’s anti-corruption drive would hit luxury-goods sales in China

It was all very well owning several Audi limos and a collection of $100,000 watches back in the days when overpriced accessories simply made everyone aware that you had made it. But today, big-brand luxury goods send a rather different message from China’s rich to China’s poor. 

Instead of saying “look at me, I’m rich”, they say “look at me I’m a thieving enemy of the people”. Not quite the same, is it?

That’s something everyone’s beginning to notice. “China buys less bling”, reads a headline in The Times today above a small story noting that Richemont (the Swiss firm that produces Cartier watches) is seeing sales stalling in Asia – they didn’t rise in the last quarter of last year for the first time in four years.

The story is picked up by the FT which notes that it isn’t just Richemont that isn’t seeing the sales it wants. In September, Swiss watch exports as a whole fell for the first time in three years, and in October and November, exports to Greater China in particular were down.

If I were holding shares in luxury goods firms, which (unless one of my investment trust holdings has them) I’m not, I would be reminding myself that, right now, China still buys about a quarter of all the world’s luxury goods.

I’d also be noticing just how frightened China’s officials are of the new war on corruption (another Times story today is about “a wave of secret property sales as officials scramble to offload incriminating luxury flats”). Then I think I would sell them. Shares in Richemont closed down 5.6% in Zurich yesterday.

  • Boris MacDonut

    You touch on a key issue here Merryn. How can China move forward and drag it’s huge, poor, rural, hinterland with it? I have long believed this to be China’s achilles heel. Massive political unrest or a break up of this vast country. The well off and modernised coast will want to dump the interior. But will the peasants let them?

  • Andrew

    Pretty simplistic analysis to be honest. Assumes the bulk of luxury goods in China are bought by dodgy officials.

    I think there will always be shrill voices around a long-term trend. In this instance the rise of China’s middle class is the long-term story.

    Picking a long-term trend and holding onto it is the way to do well rather than selling out on every scarce story such as this.

  • NeutronWarp9

    Boris – How about reading a bit of history? Rather than rely upon factors experienced simply within your own lifetime (‘house prices have ALWAYS gone up’ syndrome), study the past.
    China will drag its peasants along with it in much the same way the other BRIC countries will. When the UK industrialised the pioneers led and the agrarian people were exploited / utilised in the process as the nation rapidly urbanised. The only difference now is the presence of fierce competition that makes any boom short-lived if a market cannot be created and sustained.
    Will the peasants let them, Boris? Not all police and armed forces are like ours you know.

  • Boris MacDonut

    #3 Like I say Neutron. Massive political unrest unless the “communist” Government shares out the spoils of modernisation more fairly.

  • Clovis Bassington

    Chateau Lafite – a strong sell.

  • IJ

    @ Andrew. I think luxury goods investors are making a big mistake in assuming that the Chinese middle classes will buy proportionally more luxury goods as they become more prosperous. In fact, they are more likely to trade down to cheaper brands as the novelty of luxury wears off and they cease to confer status. Those looking to invest in this burgeoning middle class theme would therefore probably do better to look at the likes of H&M, where China currently accounts for only about 3% of sales (compare that to about 50% for Richemont if you include Europe sales that are actually to Chinese tourists). I believe luxury goods are a “sell” regardless of one’s “view” on China.

  • Nick Fury

    when these riches are rubbed in their face more overtly in what is still supposed to be a communist country….of course they will!!! who knows when though, they seem to be able to take a lot of s**t, before they do. In their history they have had ‘the great leap forward’ many times, but there is no such thing; over night. there’s more blood to come, believe me…so invest away in a country you know nothing about…and a mentality you’ll never understand….with a completely different moral set of rules…how safe is your money do you think?

Merryn

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