Barclays: China Recovery May Be Sooner Than Expected

SHANGHAI — As China sets in motion a fast-tracked opening-up plan, which includes reopening its international borders and scrapping mandatory quarantine requirements starting Sunday, whether the luxury sector will recover just as fast remains to be seen.

According to the latest report from Barclays, the Chinese luxury sector may recover faster than expected.

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Despite macroeconomic uncertainty and risk factors, Barclays predicts the sector will grow by 15 percent in 2023, while the global luxury market will record 9 percent growth, with the U.S. and European markets growing at 7 and 6 percent, respectively.

“If first-quarter sales should remain depressed in China, as the country may still battle the new surge in COVID[-19] cases following its decision to reopen gradually, we expect traffic to recover as soon as the second quarter, and we remind investors that comparables will be particularly easy by then,” read the Barclays report.

“Underlying trends indicate that consumers still have an appetite to buy luxury goods, as such we expect ongoing improving trends in the second half of 2023 as China gradually returns to a world post-COVID[-19],” the report stated.

Barclays sees Richemont as the biggest winner as China enters its post-COVID-19 phase. “The group has historically been one of the most exposed to Chinese consumers, circa 40 percent of sales pre-COVID[-19] in our estimates, and has exposure to watches and jewelry, a segment often seen as alternative assets that can hold value in an inflationary environment,” according to the report.

According to Barclays’ China economist Jian Chang, the country’s rapid COVID-19 policy pivot “suggests the economy could be moving toward our ‘better-case scenario’ — a faster reopening and smooth transition,” wrote Chang.

In December, Barclays projected China’s gross domestic product growth in 2023 could rise to 4.5 to 5 percent. The International Monetary Fund estimates that China’s GDP will grow by 3.2 percent in 2022.

“The normalization of traffic since reopening should allow brands to accelerate investments in marketing and communications, resume events, and re-create the ‘feel-good’ factor among Chinese consumers,” wrote the Barclay report. In addition, the report said the recovery of the logistics chain would allow brands to operate at a higher efficiency and lower cost.

According to Jacques Stern, chief executive officer of Global Blue, the tax-free shopping agency, there is “significant pent-up demand” for offshore spending waiting to be unleashed. “[There are] 20 billion personal luxury items per year which have not been bought by Chinese,” said Stern.

While many luxury watchers are worried that Chinese consumers could reallocate luxury spending budgets to travel and experience post-reopening, Barclays projects that “they may choose to have both.”

“For the upper-middle-class and high-net-worth individuals, we argue that the return of normal life should lead to additional occasions to wear luxury, additional needs for gifting, and a good enough reason to feel good,'” wrote the report.

By looking at brands’ exposure to the Chinese market and growth momentum in recent years, Barclays singled out Louis Vuitton, Dior, Hermès, Cartier, Van Cleef & Arpels, Moncler and Prada as brands that will benefit most if China recovers with faster momentum.

Despite being a high-traffic brand in China, Barclays thinks the growth momentum of Gucci remains to be determined due to the departure of creative director Alessandro Michele.

“We do not expect a new collection by an upcoming designer to hit the shelf before the fourth quarter of 2023, and as such, the upside in 2023 in China for Gucci, and thus for Kering, looks limited, in our view,” wrote the Barclays report.

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