European Luxury Stocks Tumble On China's "Wealth Redistribution" Plans

European luxury stocks slumped, and were among the worst performers in Europe’s Stoxx 600, after Chinese state media this week said President Xi Jinping offered an outline for “common prosperity” via "wealth redistribution" - who know that China was communist after all - that includes income regulation and redistribution, putting China’s wealthiest citizens on notice. Among the biggest losers were Richemont -5.6%, Kering -5.3%, LVMH -4.2%, Swatch -3.6%, Burberry -2.7%, Hermes -2.2%. Hong Kong-listed Prada plunges 10%.

While there are currently limited details on how to address wealth disparity in mainland China, it’s “no secret that wealth disparity is supportive to luxury demand,” HSBC analyst Erwan Rambourg wrote in emailed comments. Rambourg sees hard luxury companies such as Swatch and Richemont as most exposed to Chinese demand, and Burberry and Prada among soft luxury players.

As Bloomberg's Heather Burke writes, today’s latest drop in European luxury stocks is a canary for distress in global markets: "Luxury stocks such as LVMH and Hermes have outperformed this year as a re-opening play, helped by strong earnings and demand recovery in China. Yet today they are getting hit, with Kering, Richemont, and LVMH all down over 4%."

Luxury declines play into both China's fears and overall re-opening as the delta variant spreads, as tourism purchases often are a big source of revenue.

Regionally, the luxury selloff is feeding most into the CAC 40, by far today’s biggest regional decliner in Europe. LVMH is the French gauge’s biggest member and is responsible for almost 30% of today’s drop in terms of index points. Luxury as a pain point will make it harder for the CAC, the best-performing major Western European benchmark this year, to hit its 21-year high.

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