Head of Equity Strategy
Summary: China's new regulatory trajectory has recently extended to guidelines on behaviour for celebrities which include not showing decadent ideas of money worship, hedonism, and extreme individualism. There is a high risk that this will transcend to the wider population and especially the upper class which could negatively impact demand for luxury goods. The risk for profit warnings are rising for the European luxury industry and our basket of 12 European luxury brands is already down 12% from the peak in June.
We have recently increased our attention on China due to the recent slowdown and power shortages causing steel production to ease on top of a brewing housing market crisis. These dynamics are happening while China’s government has started a comprehensive crackdown of the technology sector including gaming restrictions encompassing controlling user data, fining companies for using their market power to limit competition, and prohibiting private tutoring companies, which is all driven by the new phrase “Common Prosperity”.
An extension of the “Common Prosperity” seems to also be a cultural reorientation in the Chinese society with authorities in China recently including new regulation for behaviour of celebrities which ensure that they abandon vulgar and kitsch inferior tastes, and consciously oppose the decadent ideas of money worship, hedonism, and extreme individualism. In other words, be less American in personal expression. This focus means that flashing your richness and expensive consumer goods such as expensive cars, fashion, and jewelry is no longer acceptable among celebrities which will directly influence the habits of the wider Chinese population.
This in turn is a key risk for Europe’s luxury makers which have enjoyed a decade of high growth in China’s consumer market with the growing upper class lusting for European luxury goods. Our basket of European luxury brands with the most exposure to China is up 126% since early 2016 compared to only 56% for the STOXX 600. However, the basket is down almost 12% from the peak in June before the recent string of regulation was put in place China including the bigger emphasis on “Common Prosperity”.
The table below shows the 12 European luxury makers we have put into the basket. Remy Cointreau and BMW are less clearly a luxury brand although they both are at the upper end of the price spectrum and prestige for spirits and cars respectively. The remaining 10 brands are all within fashion clothing and watches. The European luxury industry took a hit back in 2013 when China’s slowing economy prompted the government to crack down on luxury gift-giving as part of its anti-corruption campaign. The population back then supported the campaign and we expect the same to happen this time again. The overall idea is, that going forward the environment for luxury goods will be less rosy in China and as a result there could be profit warnings coming for European luxury makers.
| Name | Mkt Cap EUR mn | FCF/EV (%) |
| Hermes International | 134,548 | 1.9 |
| Salvatore Ferragamo SpA | 3,015 | 6.7 |
| LVMH Moet Hennessy Louis Vuitton SE | 322,540 | 4.5 |
| Remy Cointreau SA | 8,413 | 1.4 |
| Moncler SpA | 14,642 | 2.9 |
| Burberry Group PLC | 8,581 | 7.0 |
| Cie Financiere Richemont SA | 52,310 | 5.4 |
| Kering SA | 79,949 | 4.2 |
| Swatch Group AG/The | 12,185 | 10.0 |
| Tod's SpA | 1,501 | -1.6 |
| PRADA SpA | 12,209 | 5.6 |
| Bayerische Motoren Werke AG | 53,043 | 8.8 |
| Sum / average | 702,935 | 4.7 |
China is basically rewiring their economy towards a new economic model built around core pillars of restoring the environment, creating self-reliance in key technologies for winning the race against the US, and reducing inequality. These changes which will likely continue until the Party Congress in October next year, and as a result, we are recommending investors to underweight Chinese technology companies within e-commerce, social media and content platforms, and gaming, while overweight non-data driven consumer companies and companies within the technologies that China’s wants to be self-reliant in.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
