Luxury Funds Struggling Amid Weak Consumer Spending

Luxury brands, which were previously unaffected by recessions despite sluggish consumption, are now facing instability. In the first half of the year, luxury consumption in the United States stagnated, leading to disappointing performance, and the Chinese market, which showed some recovery in the first half due to reopening (resumption of economic activities), is expected to see a contraction in consumption due to recent real estate risks.

According to financial information firm FnGuide, the returns of funds related to luxury, global rich, premium brands, and global brands have all been negative over the past month. The average one-month return of 46 related funds with assets under management exceeding 1 billion KRW was -4.26%. The NH-Amundi Hanaro Global Luxury S&P Securities Listed Derivative Investment Trust (Synthetic) recorded a one-month return of -2.95%. The IBK Luxury Lifestyle Securities Investment Trust [Stock] Type A fell by 5.69%. The KODEX Europe Luxury TOP10 STOXX Exchange-Traded Fund (ETF) also dropped by 1.03%.

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The poor performance of luxury funds is due to the largest luxury consumption market, China, being weakened by last year's 'Zero COVID' lockdown measures, and sluggish sales growth in the United States. According to global consulting firm Bain & Company, the share of the United States in the global luxury market expanded from 22% in 2019, before COVID-19, to 33% last year. With the slowdown in U.S. luxury consumption in the first half of this year, luxury brands experienced weak sales in the U.S. LVMH (Louis Vuitton Mo?t Hennessy), which owns Louis Vuitton and Christian Dior, saw its U.S. sales in Q2 this year decrease by 1% compared to the same period last year. Kering, owner of Gucci and Balenciaga, reported a 23% drop in North American sales in Q2. Richemont Group, which owns Cartier and Montblanc, also saw a 2% decline in U.S. sales in Q2, while Burberry and Prada fell by 8% and 6%, respectively.

As sales in the U.S. faltered, luxury brands are pinning their hopes on the Chinese market, which had gradually recovered after the end of Zero COVID. Shim Ji-hyun, a researcher at Shinhan Investment Corp., said, "Apart from the companies' own sales growth, luxury stock prices are significantly influenced by the economic conditions of each region. Since most companies are based in Europe, the euro exchange rate distorts total sales growth, and China, a strategic region, has a greater impact on stock prices than its nominal sales proportion."

However, the recovery of consumption in China is expected to be difficult. The recovery was slower than expected even in the first half, and recent real estate risks have raised concerns about economic slowdown. Im Hye-yoon, a researcher at Hanwha Investment & Securities, predicted, "Due to limited policy capacity and slow recovery of purchasing power, the economic rebound in China will proceed slowly."

The recovery of luxury fund returns in the second half of the year is expected to fall short of expectations. Researcher Shim said, "As we move through the second half, differences in consumer sentiment by region and normalization of the base effects will likely cause overall sideways movement, but there is still sufficient reason to expect individual companies' performance beyond 2024," adding, "Selective buying during the correction phase in the second half is recommended."

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