Luxury goods market eager for China demand to rebound

The rise of conspicuous consumption in China and an inherent appreciation among wealthy consumers for the finer things in life should help the luxury goods industry recover from its current doldrums, says Louis Meagher, equity fund manager with Setanta Asset Management.

The luxury goods market has seen a pullback in recent months, brought on by global economic uncertainty and overspending during the pandemic.

“We’re currently into a second year of the current downturn,” Meagher said on the latest episode of the Soundbites podcast. “Industry growth was down about 2% last year, and it’s trending to be down around 5% this year.”

Nevertheless, Meagher said there are deals to be found in the falling stock prices of the world’s best-known luxury brands.

“This industry creates desirable products that are irresistible to aspirational and wealthy consumers,” he said. “We think the luxury goods market is still attractive from an investor’s point of view.”

In the current global volatility, stock prices of many of the Paris-based luxury goods manufacturers are down. Industry giant LVMH Moët Hennessy Louis Vuitton SE has seen its stock price drop around 43% from highs in 2023. Kering S.A., which owns the Gucci brand, is down 69% from its recent highs. And Hermès International S.A. is down 25%.

Meagher said the pullback was somewhat overdue after the industry grew “well above trend” in the wake of the Covid pandemic.

“Consumers went on a spending spree with their excess savings,” he explained. “Between 2021 and 2023, the industry grew by close to 20% a year, which is really phenomenal. To put that into context, that’s about seven to eight years of historical growth in just three years.”

He said the luxury goods industry generates annual revenues of about US$420 billion globally, with Americans making up about 29% of the spend and Chinese buyers close behind at 22%.

“China is very important. It has been a main driver of industry growth,” he said. “Pre-Covid, Chinese consumers accounted for around a third of the luxury goods consumption.”

“Chinese consumers still aspire to own Western luxury goods when they can afford them, and we saw this most recently in 2024, when they traveled en masse to Japan to buy luxury goods, to take advantage of the weak yen,” he said.

In fact, the rise of the middle class in China has prompted the introduction of some new Asia-based luxury goods players, including Beijing’s Laopu Gold Co., Ltd., that have started to give legacy brands a run for their money.

“Companies like these could take share of wallet away from the European luxury brands,” he said.

An economic slowdown and property crisis in China has led to record low consumer confidence there. But Meagher believes luxury goods have not lost their cachet among Chinese shoppers.

“We don’t know when China is going to recover, but we think there is further growth opportunity there,” he said. “It could take a while to get back to a third [of global luxury goods spend], but it’s not impossible.”

Meagher said investors saw strong recoveries after two recent downturns — the first following the global financial crisis and a second from 2014 to 2017 during China’s anti-corruption campaign.

“Our sense is that we have we’ve been here before, we’ve seen this before,” he said, adding that the industry can still grow without China, but it would probably need a China recovery to return to historical growth rates.

As for picking up deals among suppliers of luxury goods, he looks for companies with sustainable competitive advantages, high margins and good cash flow.

“A feature of the luxury goods industry is that many companies are family controlled,” he pointed out. “And so they manage the business for the next generation. They make decisions that benefit the company over the long term, rather than focusing on just short-term profit maximization.”

Meagher said these businesses have become better over time, more professionalized and more vertically integrated, giving them greater control over their quality and their image.

“There’ll always be demand for luxury products to celebrate birthdays, anniversaries and other occasions,” he said. “And therefore, when you can find investment opportunities, they can turn out to be great long-term investments.”

**

This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.