Chinese HNWIs slammed by coronavirus
Global luxury spending growth to take a hard hit amid Covid-19 pandemic
1 Apr 2020 | Janette Chen
China, being one of the leaders of global wealth growth, has been hit hard by the coronavirus outbreak. This is expected to have substantial impact on the global HNWIs market given that the country now has the largest number of people in the top 10% of global wealth distribution.
As the world’s second-largest economy, China is giving the global community many more reasons to feel concerned about Covid-19 when compared with the SARS outbreak 17 years ago.
“To be sure there are important references between this pandemic and SARS. China is a lot bigger today. It now accounts for 19% of the global GDP, compared to just 9% in 2003,” says Min Lan Tan, APAC head of Chief Investment Office, UBS Global Wealth Management.
Down trend
“China’s first quarter growth could be zero,” says Esty Dwek, head of Global Market Strategy at Natixis Investment Managers, Dynamic Solutions, noting that activity appears to be starting again.
Other than China, the Covid-19 crisis will also hit those countries with extensive travel and supply chain links with it. “And those commodity-producing countries could see growth weighed down by lower commodity demand and prices,” says Tan.
“We think that the biggest drag in Asia in terms of the GDP impact is going to be in Hong Kong, Singapore and Thailand,” says Tan, noting that this is largely due to the shock to both travel and trade.
Other than the GDP story, China has been rapidly accumulating assets, and so has its population of high net worth individuals (HNWIs).
The number of China’s HNWIs with investable assets topping 10 million yuan (US$1.45 million) reached 1.97 million by the end of 2018, according to the 2019 China Private Wealth Report released by global consultancy Bain & Company and China Merchants Bank. The country ranks second globally in terms of billionaires, following the US, according to UBS.
China’s rich contribute to global wealth market growth, particularly in the luxury goods industry. The country has now become the major driver of global luxury spending growth - Chinese consumers are predicted to make up almost two-thirds of the industry’s spending growth.
Global luxury spending
China has been the world’s second-largest market for personal luxury goods since 2016. That market was worth US$381.7 billion in 2019, accounting for 40% worldwide, according to data from Chinese think-tank Yaok.
The country also delivered more than half of the world’s luxury spending growth between 2012 and 2018, and is expected to deliver 65% of it by 2025, according to a report from McKinsey.
This is largely due to the emergence of vast numbers of newly wealthy Chinese over the past decade. Chinese buyers now dominate purchases across categories, from cars to watches, according to Julius Baer’s Global Wealth and Lifestyle Report 2020.
However, it is inevitable that the Covid-19 outbreak will have an impact on this sector. The pandemic is hurting the luxury goods sector as shopping malls are either closed because of it or seeing very limited numbers of customers.
On top of this, Chinese regulators have called for travel agencies to suspend sales of domestic and international tours in an effort to contain the spread of the virus. Many countries have also suspended flights from China, which will reduce Chinese overseas luxury spending.
Chinese analysts note that predicted luxury spending that normally would have taken place during the Spring Festival holiday season was down 70% as a result of the virus, but that online channels may be able to ease the current pain that most of the luxury brands outlets are enduring.
Chinese consumers lead the world in purchasing luxury goods online, according to a McKinsey report, with about 8% of Chinese luxury consumers using e-commerce channels.
In 2019, e-commerce luxury sales generated US$7.5 billion in revenue, accounting for 16% of total luxury sales in China, according to Yaok. This represents a 40% year-on-year growth and is predicted to increase by 50% in 2020.
With more Chinese luxury consumers switching to online channels and the Covid-19 outbreak hitting offline sales, investing in online channels can be a wise choice for players in this sector.
Other than the spending issue, the health crisis is also impacting how wealth should be managed given the increased uncertainty of the market.
Investment strategy
The impact of Covid-19 has already been reflected in the market. The valuations of many companies in the tourism, retail, consumer discretionary-related, transportation and IT sectors were slashed during the recent Asian equity market sell-off, according to Siddhartha Singh, managing director, investment director, Asia Equities at PineBridge Investments.
With valuations down, investors are starting to think about whether it’s a good time to add exposure to Asian equities. Wealth managers see the pandemic triggering a short-term setback with the market likely rebounding in Q2 due to pent-up demand. Over the medium term, UBS remains positive about emerging market equities.
“We continue to prefer emerging market equities, and are more cautious on eurozone stocks,” says Eva Lee, head of Hong Kong Equities, UBS CIO Global Wealth Management. For emerging-market equities, the forward price-to-earnings discount to their developed-market peers increased recently to 28%, wider than 5- and 10-year averages, Lee notes.
“Market timing is difficult. We would view each dip as an opportunity to add exposure,” says Tan, though it is still too early to bottom-fish given the level of uncertainty. UBS views valuations in Asia ex-Japan as reasonable at 1.6 times book value, which is a near-35% discount to global peers.
“We are overweight in Asia ex-Japan equities, and we like the Chinese equity market in particular,” Tan says.
“For equities in Asia, there are stocks and sectors that we would avoid. We think that the drawdown to 2020 earnings and cash flows can be severe and permanent for certain sectors. This will include airlines, the tourism-related sectors, and selected consumptions and discretionary sectors,” says Tan.
On the other hand, some themes are gaining traction. The pandemic is making the Chinese rely more on online channels, such as online learning platforms, remote office systems, web-conferencing systems, online gaming, online healthcare services, and e-commerce.
“Stay-at-home business models in online consumptions and services are doing well in the current environment. We think these sectors will likely see their penetration rates and adoption rising structurally even after this health crisis,” says Tan.
“And 5G supply chains also look attractive on dips,” says Tan. “There are also opportunities to pick up on some quality Asian corporate champions with share prices that have lagged the recent market rebound,” she adds.
“We do believe the fundamentals remain constructive, and the outbreak could peak by the end of Q1. There should be a very deep slump in Q1, but also a rebound from Q2 onwards because of the pent-up demand, inventory restocking and policy boost,” says Tan.
As well, regulators will react to the crisis. “Policymakers across the region have two or three levers at their disposal to lessen the impact of the outbreak on the economy and companies,” Singh observes. “For one, they could inject liquidity into the system, as China has recently done.
“They could also launch new fiscal measures, for instance in the form of extra spending for health care, among other responses. And finally, some could take the monetary easing route to reduce the debt service burden or stimulate extra lending and investment. In line with this, Thailand and the Philippines have already cut rates.”
The Asian market can end the year higher than where it is today if the various authorities can keep the pandemic under control. “Ahead of the virus, the fundamentals in terms of both earnings and micro-data were improving. We think the Asia economic recovery that was already happening prior to the coronavirus is going to be delayed rather than derailed,” says Tan. UBS expects earnings to rise close to 12% in Asia ex-Japan this year. 
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