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Stimulus measures may not be enough to drive Chinese luxury demand recovery - UBS

Published 09/30/2024, 09:26 AM
© Reuters
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Investing.com -- A recent slew of stimulus measures from China may not be enough to drive a recovery in demand in the country's key luxury market, according to analysts at UBS.

Last week, Beijing unveiled a package of new policies aimed at providing support to China's sputtering economy and teetering housing sector, including a cut to interest rates and a reduction in existing mortgage costs.

The People's Bank of China also announced a swap program with an initial size of 500 billion yuan designed to give funds, insurers and brokers easier access to funding needed to purchase stocks. The PBOC also said it would provide up to 300 billion yuan in cheap loans to commercial banks in a bid to help them fund share purchases and buybacks by listed companies.

Stocks in China posted their best weekly performance in almost 16 years following the announcement, and the upturn continued into Monday.

In Europe, luxury giants like LVMH (EPA:LVMH), Kering (EPA:PRTP) and Hermès (EPA:HRMS) all saw their shares spike on hopes that the stimulus would rejuvenate tepid demand in China, a crucial market for the sale of high-end items. The country accounts for roughly 30% of the sector's sales, according to UBS.

However, analysts have argued that China may need to roll out more measures to sustainably prop up the economy. Data on Monday showed that China's factory and consumer activity remained sluggish in September.

The UBS analysts noted in particular a tie between prices for property -- one of the focal points of China's economic woes -- and luxury demand, adding that about 40% of Chinese wealth is in real estate. For comparison, the figure is approximately 30% in the US.

"[G]iven the concentration of Chinese wealth in property it seems that this part of the market may be key to luxury consumers' 'feel good' factor," the UBS analysts wrote in a note to clients on Monday.

They added that, although further details about more supportive measures from Beijing are pending, it will "take longer and cost more" to stabilize the property market due in part to excess housing supply and a "substantially increased household debt ratio."

As a result, they argued that more stimulus alone "may be enough to drive a rebound in Chinese luxury demand."

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