Chinese Medicine

LONDON, United Kingdom — The Savigny Luxury index ("SLI") recorded in August its worst monthly drop since the global banking crisis in 2008, plunging 12.3 percent and erasing all gains since the beginning of the year.  The MSCI World Index ("MSCI") also took a dive, losing 8.2 percent on the month.  The devaluation of the renminbi, coupled with a further stock market correction in China, caused a massive exodus from the sector.

Big news

• The Shanghai Composite Index has been in freefall since June despite strong government support measures.  With 80 percent of the Chinese stock market investors being individuals, the crash has had a direct and immediate impact on discretionary income and expenditure.  To add insult to injury the renminbi’s 1.9 percent devaluation on August 11, which was followed by further rounds of devaluation over the following days, was the largest one-day drop in the currency’s value since 1994.

• Swiss watch exports tumbled 10 percent in July, the biggest monthly drop in six years.  Growth, albeit relatively modest, in Europe and the USA could not compensate for yet another month of severe contraction in Asia, with exports to Hong Kong and China falling respectively 29 percent and almost 40 percent.

• First half results for many players came broadly in line with expectations, although helped by a weak euro.  With the exception of Hermès, which announced it would stay the course in China, companies voiced concerns over their exposure to the country: Ferragamo notably mentioned potentially scaling back its store expansion programme.

• Global rights to legendary couture brand Paul Poiret were acquired by Korean retail group Shinsegae International this month.  Corporate activity was otherwise subdued.

Going up

• Michael Kors was the only stock to post gains, albeit modest, of 3.5 percent this month, driven by better than expected quarterly results.

Going down

• Stocks representing 98 percent of the value of the SLI fell this month.  Ferragamo was the worst hit, losing 16 percent: Asia is the brand’s biggest market, the Italian group having been one of the first luxury brands to develop a significant retail presence in China.

• Second-worst performer was Tiffany, which lost 14 percent in August on the back of disappointing results, its profits weighed down by a strong dollar and increased development costs for new lines.

• Whilst still going down this month, less China-dependent stocks such as Brunello Cucinelli and Luxottica benefitted from their higher exposure to the US and suffered smaller losses than their peers.

What to watch

The last time the SLI fell this sharply was in the aftermath of the global banking crisis in 2008.  Whether the situation in China spins further out of control is a subject for debate but the luxury sector’s newfound reliance on the very consumer that rescued it from the last global crisis may well be finished.