Pathos? Greek Crisis and Chinese Stock Market Drama Hit Luxury Sector

LONDON, United Kingdom — The Savigny Luxury index ("SLI") ended the month down 3.5 percent whilst the MSCI World Index ("MSCI") fell slightly more at 4 percent. The latest chapter in the Greek tragedy, combined with further signs of slowdown in China, has led to a minor flight from the luxury goods sector. Investors are worried again.

Big news

Rarely do we discuss broker recommendations in our market commentary but Merrill Lynch’s note this month downgrading the sector caused a stir with some share prices losing up to 4 percent on the day of the note. We believe this is a sign of malaise returning to luxury goods. There has not been much by the way of positive newsflow this month and worries persist over China’s economic growth and the future of Greece and the Euro.

Swiss watch exports recorded their biggest drop since 2009, falling 9 percent in May. Much of this was driven by continued decline of sales in Hong Kong (-34 percent), caused mainly by retailers holding back their orders in anticipation of price decreases to compensate for the sky-high Swiss Franc.

The beauty industry has been notably active this month: AmorePacific and Parfums Christian Dior agreed to a strategic partnership regarding AmorePacific’s innovative makeup compact cushion technology; Unilever acquired Dermalogica; private equity group General Atlantic acquired Too Faced Cosmetics; CVC Capital Partners acquired Douglas, Europe’s second largest perfumery chain; and Coty pressed ahead with its acquisition of P&G’s beauty business. In other segments, Palamon Capital Partners acquired Italian luxury leather goods brand Bisonte Industriale.

Going up

• Mulberry gained 1.3 percent as positive results of its strategic U-turn back to its affordable luxury roots, spearheaded by incoming CEO Thierry Andretta, came in.

• Ralph Lauren curbed the recent decline in its share price by reassuring the market on its ability to streamline the organisation and by increasing its average prices by the introduction or more expensive lines. The stock rose 1.5 percent on the month.

Going down

15 out of the 19 stocks, representing 90 percent of the market value of the SLI, fell this month.

• Prada lost 12.3 percent of its share price, reaching a three-year low during the month, driven by poor first quarter results. Its net income fell 44 percent in the quarter, driven principally by depressed demand in China. The company warned that profits would remain depressed if the current consumption climate persisted in China.

• Michael Kors continued its downslide in the aftermath of its results announcement at the end of May, losing 9.5 percent on the month.

What to watch

Never mind the Greek tragedy currently unfolding: China looks to be in trouble. The country’s stock markets have been tumbling, with the Shanghai composite losing almost a third of its value in June, resulting in many stocks being suspended from trading. The government has stepped in to paper over the cracks by various measures, including another easing of interest rates, pledging to buy shares and getting companies to pull IPOs. So far these measures have had little impact. Demand for luxury goods in this key market is already waning but the situation could get a lot worse in coming months.

Sector Valuation