Luxury Stocks Are Going Out of Fashion. It’s the China Syndrome.

Luxury stocks are at risk from China’s slowdown after riding high for months on optimism that the rich would return in force to shopping in the world’s second-largest economy and to traveling abroad to browse in the finest stores.

But how big is the risk?
Not long ago, for example, Wall Street considered shares in LVMH MC –0.35% (ticker: MC. France)—the French company owns dozens of high-end brands, from fashion and fragrances to wine and watches—to be one of the best plays on the post-Covid reopening of China.

The logic made sense: Wealthy Chinese shoppers would come out in droves after the country lifted its zero-Covid policy in late December—both at home and abroad. After all, they had been big spenders before the pandemic.

Now, though, that reasoning is being questioned as evidence of an economic slowdown in China piles up. Chinese imports and exports are down, a sign that demand—both international and domestic—is waning. The loudest alarm sounded a couple of weeks ago when consumer spending for July fell so much that the country slipped into deflation.

“Weak China macro data suggest a much softer consumption recovery post Covid-reopening than the strong rebound seen in the U.S. and Europe in 2021-22 and in Japan more recently,” Rogerio Fujimori, an analyst at Stifel , wrote in late July.

Still, China is standing firm on a 5% increase in annual gross-domestic product (GDP)—with the help of government stimulus. Analysts and investors, however, consider a 5% growth rate simply enough to get the economy on track but not nearly enough to jump-start it.

The uncertainty has certainly weighed on luxury stocks in the past few months. LVMH, which boasts the white-glove brands of Tiffany, Dior, and TAG Heuer, again is a prime example. Shares are down more than 10% from their April high of 900 euros ($984).

And others in the luxury sector are faltering, too. Cie. Financière Richemont CFR –0.04% (CFR. Switzerland, CFR. South Africa), which owns Montblanc and Cartier, is down nearly 19% since its peak of more than 155 Swiss francs ($177) in mid-May. Kering KER +0.17% (KER. France), which owns Gucci and Balenciaga, soared to 600 euros ($655) at the end of March; now, the stock is off almost 17%. Hermès International RMS –0.53% (RMS. France) peaked later, at above 2,016 euros ($2,202) on July 31, but has lost more than 4% in just the past month.

Despite the steep losses and China’s discouraging economic numbers, all four stocks—LVMH, Richemont, Kering, and Hermes—have an average rating of Buy from analysts surveyed by FactSet. And their average target prices imply upsides of 19%, 33%, 24%, and 6%, respectively.

The most likely explanation for the head-scratching rating: It is better to be exposed to shoppers in Asia’s largest economy than not, especially when analysts expect demand in the U.S. to soften as well. Put another way: Missing out on China’s growth is a better risk than China’s slowdown.

Stifel’s Fujimori put a “gradual comeback of the all-important Chinese clientele” at the top of his list of reasons that Richemont is set “to navigate better than most through a period of softening U.S. demand.” He rates the stock Buy.

Jean Danjou, an analyst at ODDO BHF, cited “clear room for improvement on the group’s overall positioning in Asia-Pacific and China” as an unfavorable trend for Kering, which he rates Neutral.

A prolonged deep slowdown—and certainly a financial crisis—would weigh on China’s wealthy. For now, at least, the risks only make luxury stocks less fashionable—and not an investing faux pas.