There are good reasons to be cautious on the outlook for the luxury goods sector in the short term, following the Chinese government’s plan for curbs on excessive income, according to broker Berenberg.
However, in the longer term, the outlook is positive, as any wealth distribution policies should benefit the Chinese middle class and are likely to be introduced gradually, reducing the risk of demand shocks, Berenberg said in a note.
When Chinese President Xi Jing Ping in August flagged plans for “common prosperity” in China, he called on the wealthy to give back more to society. With Chinese consumers representing around 35% of global luxury demand, these plans led to a sell-off in the luxury goods sector.
The Chinese government has yet to announce the details of its wealth distribution plans, but they are likely to involve higher taxes for the wealthy – possibly on property, capital gains and inheritance, Berenberg said.
In the short term, “higher taxes, possibly falling asset prices (reducing the ‘wealth effect’) and general heightened uncertainty could all weigh on luxury goods spending. The government crackdown on celebrity influencers could also disrupt local marketing strategies”, the broker said.
The broker has a ‘buy’ recommendations on both companies, with a price target of 1,200p on JD Sports.
Looking at the longer term, “the exponential growth of the middle class is what is key to luxury spending, and this should benefit from wealth redistribution”, the broker said.
“It also appears that new policies will be implemented gradually, reducing the risk of a demand ‘shock’, and there is a chance the policies may remain a slogan but not be strictly enforced.”
For the longer-term view, the broker favours Kering – its luxury top pick – and LVMH. It has a ‘buy’ recommendation on both companies.
In early afternoon trading, JD Sports shares were 1.89% higher at 1,052p, while Burberry was up 2.17% at 1,933p.