UBS Evidence Lab suggests Chinese luxury consumption can reaccelerate
The Chinese consumer has underperformed expectations in 2016 declining high single digit globally we estimate. We conducted the second wave of our UBS Evidence Lab survey of 1,094 Chinese consumers (first wave H2 15) and conclude that whilst there are some structural influences behind the weakness, attitudes to luxury remain optimistic suggesting some cyclicality is also at play. We would therefore expect to see an eventual recovery of Chinese consumption which supports our forecast for the sector to return to 4% organic growth in 2017 after a decline of –2% this year. The market is already attributing less of the sector's share prices to long term-growth than history with this standing at 18% today versus 24% in 2013. This looks reasonable but short term negative earnings momentum could still weigh and we sit c.5% below consensus in 2016. We prefer companies where we believe there is good brand momentum such as Kering and Moncler or a restructuring opportunity such as Burberry. LVMH remains our top defensive pick in a challenging market.
How much of the current Chinese luxury consumer weakness is structural?
Our UBS Evidence Lab survey shows that there may be structural factors at play such as consumers looking to spend less time shopping abroad and increased Chinese import restrictions. However, there are also cyclical elements such as the unwind from the FX driven international spending boom last year. The consumer remains optimistic about
their personal finances with attitudes to luxury positive. Responses also suggest that they are looking to increase spend allocation towards luxury relative to six months ago.
Soft luxury: Gucci and surprisingly Prada have gained ground on Louis Vuitton
Whilst Louis Vuitton remains the highest ranked brand with the consumer Gucci and also surprisingly Prada have improved relative over the last 6 months. Elsewhere Burberry and Moncler have also improved whilst Tod's and Hugo Boss have weakened.
Hard luxury: consumer demand surprisingly positive but destocking outweighs
Watches have been weak due to the overhang of stock in the channel post the government's anti-extravagance campaign. Survey responses continue to show surprisingly robust demand from the consumer outside of this albeit we do not yet expect this to outweigh the destocking. Jewellery shows a more upbeat outlook.