Might the spending power of the Chinese consumer, thus far sparkling like a Tiffany bauble, lose its luster?
We use the famed Tiffany here, because that very purveyor of luxury goods that may be a bellwether for a sea change in spending patterns.
As detailed by CNBC, Oppenheimer downgraded Tiffany’s shares from outperform to perform. The ratings shift is not a drastic one, and, in fact, the price target is being maintained at $145, but analysts point out some trends that bear watching: The devaluation of the Chinese yuan may impact tourists’ spending as they come stateside. Oppenheimer wrote, “Recent shifts in global currencies could impact the buying power of Chinese tourists in the U.S.”
The concept is a simple one. If the Chinese yuan is worth less against the dollar, then it takes more yuan to buy a dollar. That means fewer dollars upon conversion here, which, in turn, means fewer dollars in the tourists’ collective pockets. High end goods? Well, those take some dollars.
According to Euronews, those hoping to make money off of Chinese consumers can blame the trade war. The latest back and forth of tariff mongering between the U.S. and China may have its victims beyond soybean farmers, automakers and whiskey distillers. The fact remains that many other verticals rely on consumer spending beyond U.S. shores. The yuan is down several percentage points since June.
At the same time, the Chinese government seems keen on boosting spending internally to help prop up some businesses sectors. Tax cuts and incitements (last month regulators advocated slashing interest rates for small and mid-sized firms) mean that spending activity is concentrated within China’s borders.
The ripple effects may be a bit delayed, and depend on just how long the trade war lasts. Indeed, the yuan is trading at its lowest levels against the dollar in a decade, and yet, some high-end retailers have said nothing appears to have changed this earnings season. LVMH, which owns Louis Vuitton, said last month that it had not yet seen any impact from the trade war, nor had Michael Kors. Kering, which owns some iconic offerings such as Gucci, said that the consumer outlook from Asia does not auger in a slowdown.
Reuters noted Friday that “a glittery stock market run” may be in peril for some of these high-end retailers. Valuation is at risk, and valuations are high. By one of the simplest metrics, price to earnings, valuations are about 23 percent higher than the 10 year trailing average. Ostensibly, valuation is underpinned by fundamentals.
One fundamental foundation underpinning Chinese consumer spending: The older generation is footing the bill. As Reuters explained, parents and grandparents are paying for the spending of younger consumers, financed in part by property values (we’ll call it the the wealth effect). But as noted just this week, there are some bubbles that seem to be headed toward deflation in worldwide property markets (and that includes China). Any number of psychological factors could come to bear on consumer confidence here, and a significantly weakened currency will not help.
At that point, luxury will feel like too much of a, well, luxury.