15th October 2010
Low levels of debt, the rise of a middle class, rapid urbanisation and growth in consumerism mean China is becoming increasingly enthralled by luxury goods. Good news then for investors looking for retail exposure in a fast growing economy.
In terms of nominal gross domestic product, China now ranks second globally, having overtaken Japan during the course of the last 12 months, as this report by Bloomberg noted in August.
According to analysts at Henderson Global Investors, the Chinese economy offers good growth not only on the basis of developments like the continued rise of the middle class and modest risk underpinned by low levels of debt. There is the attendant increase in disposable incomes to consider and the strong likelihood that, going forwards, a higher proportion of spending by consumers will be on discretionary goods.
Henderson says the rapid creation of wealth has fuelled luxury sales in 2009, such that China is now the second largest luxury goods market after Japan. "The Chinese consumer is becoming more discerning and aspirational. Indeed this is a trend that is becoming more marked in developing economies, say the analysts.
Only yesterday, as reported by the Daily Telegraph, Burberry, the luxury goods retailer, said that like-for-like sales in its stores around the world increased by 9% over the six months to September, boosted by shops in emerging markets. Stacey Cartwright, Burberry's finance director, says the retailer's largest customer group in the UK is now Chinese consumers visiting the country. This group has overtaken Middle-Eastern shoppers as the largest customer group over the last year, she adds.
Also yesterday Hugo Boss, the luxury clothing retailer, raised its 2010 outlook as its growing retail business and a Chinese joint venture helped it post consensus-beating third-quarter operating profit. The Irish Times reported the company's chief executive Claus-Dietrich Lahrs as saying luxury markets might recover much faster than expected, helped by demand from Asia, especially China.
Retailing in China is still highly fragmented but Henderson believes rapid structural changes should see consolidation in the sector, with an increasing share of spend being captured by domestic and international retailers. Retailers are also becoming highly competitive in terms of quality of offer, product differentiation, and price, meeting the demands and desires of the Chinese shopper.
The analysts conclude that the Chinese retail sector, and associated real estate, should provide an interesting environment for investors with some solid growth potential through smart stock selection.
They add: "Property in China is becoming a more popular investment class and perceived risk is now much reduced. Property investors should, however, be mindful of supply threats as development is rife. But well-anchored, good quality assets that meet the requirements of domestic and international retailers should demonstrate growth in line with GDP, and offer returns ahead of comparable assets in more mature markets."