Concerns about a potential slowdown in China are likely to impact the performance of the luxury goods sector, according to broker UBS.
The luxury sector is highly exposed to Chinese consumers, who accounted for 35% of sales in 2019 and 28% in 2020.
UBS said in a note that investor concerns were driven by fears of renewed COVID restrictions in China, a potential economic slowdown and the risk of anti-wealth flaunting policies in the country.
The Chinese government is calling for regulation of excessively high incomes and encouraging high-income groups and enterprises to return more to society, which could bring potential volatility to the Chinese luxury market, the broker noted.
“Given luxury goods' relatively high Chinese exposure and its valuation (currently trading at around 90% premium to the MSCI Europe Index, above its historical around 50% average), we think the ongoing China concerns could weigh on the sector in the near term,” UBS explained.
“Although the impact on sales, if any, at this stage may be difficult to estimate, we note that based on the history these concerns could drive a period of a de-rating vs the market.”
Among the luxury goods companies most exposed to Chinese consumers are Burberry Group PLC (LSE:BRBY) (LSE:BRBY), The Swatch Group, Richemont and Prada, UBS said.
Burberry share were 5.4% lower at 1,834p in afternoon trade.