Cautiously optimistic Chinese message for luxury

• STOXX 600 up 0.6%
• Defence stocks lead
• Kering rises on beauty unit sale
• Wall St futures edge up

CAUTIOUSLY OPTIMISTIC CHINESE MESSAGE FOR LUXURY

Signs of improved demand in China sent LVMH surging last week, along with the broader luxury sector, and so Monday's note from HSBC looking at Chinese demand for European luxury is topical.

They too find reasons for optimism after spending a week in Hong Kong, Shanghai and Wuhan, even though this doesn't have much to do with the macro environment.

Instead it's because there comes a point when things can't get much worse.

"We are seeing the basis of comparison really play in (“you can’t do -25% on -25% forever) at a time when brands are finally starting to reinvest in both capex and opex," the strategists write in a note.

On top of that, they think that some "newness and buzz" which had been lacking in the market is now coming back, with the rebound in energy "palpable in both Shanghai and Hong Kong."

As an example they give Louis Vuitton's ship-shaped building in Shanghai. "In a market that needs some joy, an element of surprise, real reasons to reconnect with brands given the morose backdrop, the initiative is clearly hitting a nerve even four months after the opening," the note said.

HSBC sees outperformers at either end of the luxury market, with Coach, Ralph Lauren, and Longchamp growing well as are Hermès, Loro Piana, Cartier, and Cuccinelli.

But they caution not to get too excited by this as a macro signal.

"The property market is still hurting − even if it represents lower contribution to total assets. And youth unemployment is also hurting, likely making the average luxury purchaser slightly older than in the pre-COVID era."

(Alun John)