Merryn's Blog

Luxury-goods firms feel the heat

It used to make sense to buy shares in luxury goods firms. People were getting richer and rich people like luxury goods. But these days, conspicuous consumption has its downsides.

I've written here several times about the rising risks in holding luxury-good-company stocks. A few titbits in the newspapers over the weekend make the case for selling out ever more clear.

First, a small story in the Guardian. It notes the case of state official Yang Dacai and his watch collection which I tweeted about last week. Yang was shown in pictures online wearing, onseveral different occasions, a variety of different ludicrously expensive watches, none of which he should have been able to afford on his official salary. He is now being investigated by the party's provincial discipline inspection committee (which doesn't sound that nice).

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Yang's troubles aren't a one off. There is also uproar over a Ferrari crash back in March in which it is rumoured that the son of one of President Hu Jintao's allies died. Gatherings of top politicians are now routinely picked apart by bloggers for evidence of the kind of designer gear no one living on a state salary alone could afford.

The result? The government, says the Guardian, "has ordered officials to eschew luxury cars and expensive banquets". So, not only is itno longer a great idea to advertise your tendency to corruption and nepotism via your watches, suits and cars (see my blog "Look at me, I'm a thieving enemy of the people"), but the government has told you to give it a rest as well. I can't see how that can be good news for all the luxury goods companies relying on China for their growth.

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And it isn't just in China where the likes of Ferrari need to have their wits about them. The Sunday Times Ingear section this week had a small piece on supercars and VAT. Regular readers will know that ownership levies on high-performance cars in Italy recently quadrupled it now costs around £6,500 a year in taxes to own a Lamborghini. They might not know that this has given the Lib Dems ideas.

Their policymakers, in their odd breaks from planning unworkable wealth taxes, are apparently "drawing up plans for a higher rate of VAT on expensive vehicles which could add at least £8,000 to a new Ferrari or Lamborghini". It used to make sense to hold luxury goods on the basis that lots of people were getting richer and that rich people like to overpay for luxury goods. Neither of those things are as true as they were.

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