China’s state-run media is referring to today as “Black Monday.” The country’s flailing stock market has been bad news for stock indices around the world, and for any company that counts on Chinese consumers for sales, including a number of luxury fashion companies.
China’s market dive doesn’t bode well for them, and investors know it. As the Wall Street Journal reported, hedge funds have been targeting luxury stocks for short sales.
The luxury sector is particularly exposed to catching a cold when China sneezes. Swatch and Richemont, both high-end makers of watches and jewelry, derive more than 40% of their revenue from Chinese shoppers, according to a recent Deutsche Bank report. Salvatore Ferragamo, Gucci, Hermès, Burberry, and Prada all get more than 30% of their revenue from Chinese shoppers.
A quick look at luxury stocks over the past month reveals the same pattern across the board: a dip on August 11, when China first devalued its currency, a sign to many that China’s economy wasn’t as healthy as had been previously reported. A leveling off then followed, until on August 19 there was again another drop as the Chinese market went into turmoil. That plunge has continued through trading today (August 24).
The scary part, for shareholders and just about everyone else, is that nobody really knows how bad China’s economy will get. What is clear is that the market isn’t yet showing any signs of stabilizing.