Europe's Luxury Rally Founders as China, Greece Hurt LVMH

May 11 (Bloomberg) -- The biggest rally in three years for [URL=http://www.luxuryproduct.us/]luxury product message[/URL] makers in Europe is fizzling on concern slower economic growth in China and renewed euro-area political turmoil after Greece's inconclusive election will choke off demand.

The nine-company Bloomberg European Luxury Goods Index, whose clothiers and watchmakers get 34 percent of sales from Asia, tumbled 5.5 percent over the past five days, the largest decline since Nov. 24, data compiled by Bloomberg show. The Stoxx Europe 600 Index retreated 2.5 percent. The luxury gauge surged 25 percent in the first quarter as designers Hugo Boss AG and Salvatore Ferragamo SpA gained more than 50 percent.

China's cooling growth, the political impasse since Greece's May 6 election and proposed tax increases from France's new president are hurting the industry. Francois Hollande, who defeated Nicolas Sarkozy to become the first Socialist in 17 years to control Europe's second-biggest economy, has proposed a 75 percent levy on incomes above 1 million euros ($1.3 million). Swatch Group AG, the world's largest watchmaker, gets 38 percent of revenue from China, home to more than a million millionaires, and Burberry Group Plc generates 33 percent of sales in Asia.
"With the growth momentum in China slowing, what has been pushing the luxury-goods sector higher and higher is bound to weaken as well, and luxury companies will see an end of their massive rally," said John Plassard, a director at Louis Capital Markets SA in Geneva. "2012 will prove itself a transition year."

Slowing Growth

The Bloomberg luxury index retreated 3 percent from April 13, when a report showed Chinese gross domestic product trailed forecasts last quarter, through yesterday. That's three times more than the Stoxx 600, which slipped 0.9 percent. Swatch, Burberry, the U.K.'s largest luxury-goods maker, and Hugo Boss were the gauge's worst performers in that period. The index rose 0.6 percent today.
The measure tumbled 62 percent from the end of the second quarter of 2007, when Chinese growth was an annualized 14.5 percent, through the first quarter of 2009, when economic expansion bottomed at 6.6 percent, data compiled by Bloomberg show. The Stoxx 600 dropped 57 percent over that period.
The number of dollar millionaire households in China climbed 31 percent in 2010 to 1.11 million, ranking the country third behind the U.S. and Japan, according to a Boston Consulting Group survey released last year.

Growing Valuations

The rally in luxury stocks has pushed Burberry's valuation to 19.9 times estimates earnings, compared with a low of 5.5 in November 2008, according to Bloomberg data. Swatch shares have risen to 15.1 times forecast profits from a low of 6.5 and LVMH Moet Hennessy Louis Vuitton SA has increased to 16.9 times from 8.7. The Stoxx 600 as a whole is trading at 10.5 times projected income, the data show.
"I've become more cautious on luxury goods as the valuations don't look as attractive," said Peter Braendle, who helps manage $60 billion at Swisscanto Asset Management AG in Zurich. "I've reduced positions in recent months to a light buy, down from a strong buy." Braendle said he would reduce his weighting to neutral if growth in Asia, especially China, slowed further.
China's economy expanded 8.1 percent in the first quarter, the slowest pace in almost three years. Foreign direct investment sank for a fifth month in March, while house prices fell in a record 37 of China's 70 cities tracked by the national government.