Luxury brand stocks tumble on China fears

Searches of returning Chinese travellers have become stricter, fanning investor concerns

Chinese border guards searching travellers’ suitcases for undeclared Louis Vuitton bags, Gucci loafers and Tiffany necklaces are giving luxury goods makers their biggest scare in years. Shares of some of the biggest brands — from Prada to Shiseido — tumbled on signs that Chinese officials are cracking down on travellers returning from places like Paris, London and Tokyo loaded with high-end merchandise.

The stricter scrutiny is adding to fears of a slowdown in spending by China’s consumers, who account for two-thirds of the luxury market’s growth. Luxury investors were already skittish, as the effects of the US-China trade war threaten a three-year spending boom.

Spending worry

“Spending on luxury goods by travelling Chinese shoppers in overseas markets could slide on concerns of increased scrutiny by customs authorities,” said Bloomberg Intelligence analyst Catherine Lim. “This may hurt sales in country of origin for branded goods in popular categories such as cosmetics and bags.”

Shares of Louis Vuitton owner LVMH extended losses for a second day on Thursday, losing as much as 3 per cent after tumbling the most since 2008 the previous day. Gucci owner Kering SA dropped as much as 4.3 per cent. Rivals Tiffany & Co., Michael Kors Holdings Ltd. and Coach owner Tapestry Inc. were also routed Wednesday.

The sell-off spread to Asia yesterday. Prada tumbled 10.5 per cent in Hong Kong, the biggest drop in more than a year. Japanese cosmetics company Shiseido slid 6.7 per cent for its largest decline since February.

Terry Hong, an analyst at Guotai Junan Securities Co., played down the significance of the border crackdown, noting that such actions have been happening over the past two years. The broader global market selloff and concerns over China’s slowing economy are also impacting the sector. The tariff spat with the US is dragging on China’s growth, with factory activity in retreat and the yuan sliding.

“The luxury brand shares are usually hit the most amid the depressed sentiment over the slowdown in Chinese consumption,” he said. “Investors are likely overreacting on negative news when the market is weak.”