Emerging market strength means luxury is down but far from out

FOR a while it seemed like the luxury goods retailers would escape the global recession relatively unscathed. The rich would still remain relatively rich and any loss of custom in developed countries would quickly be replaced by growing demand in emerging markets like China. That hope has vanished in the past two weeks as the sector has finally succumbed to consumers tightening their belts. <br /><br />French luxury label Christian Lacroix has launched insolvency proceedings, blaming &ldquo;the consequences of the global financial crisis which has sharply hurt the luxury goods industry.&rdquo; Aquascutum is shedding staff and the situation has been made worse by the failure of its distributor in China and South East Asia. <br /><br />With a slow and protracted recovery forecast, it would be tempting for contracts for difference (CFDs) traders to short the luxury good sector. Rational though this might be in the near-term, the larger, listed luxury goods companies such as Paris-listed Louis Vuitton Moet Hennessey (LVMH) still have strong prospects.<br /><br />RBS equity analyst Thomas Deitz has kept the group on a sell rating but has nonetheless raised the target price to &euro;47.60 from &euro;33.10 &ndash; it is currently trading at &euro;58.47 &ndash; and has upped his forecasts for the group for 2009 and beyond, based on expected gains from foreign exchange movements.<br /><br /><strong>DEMAND RESILIENCE</strong><br />LVMH&rsquo;s brand recognition in China will also be beneficial to the French group, according to Bernstein Research. &ldquo;Our survey of Chinese luxury retailers suggests demand resilience through the first and second quarters of 2009, most notably for mega-brands with high brand recognition. This is consistent with our expectation that mega-brands would be even more advantaged in emerging markets and that a slowdown favors the most prominent brands in each category, as retailers and consumers alike turn more conservative,&rdquo; senior analyst Luca Solca writes in a note.<br /><br />Other brands that Solca highlights as having potential resilience in China due to brand recognition are Gucci &ndash; owned by French PPR &ndash; and London-listed Burberry. Exposure to luxury goods stocks may be slightly more tempting in anticipation of a macroeconomic rebound, which would be for LVMH, given its balanced portfolio and size.<br /><br />While the luxury goods sector may be down on its bullish activity in the boom times, continued strength in Asian emerging markets will ensure the sector survives the current downturn.