Chinese slowdown fears hit LVMH shares and luxury rivals

By Sarah White and Pascale Denis

PARIS (Reuters) - Robust sales growth at luxury goods leader LVMH in the third quarter failed on Wednesday to quell fears that Chinese demand for high-end fashion and handbags will start waning, sending its shares lower and rattling those of competitors.

Markets are on edge over a simmering trade war between Beijing and Washington and its knock-on effect on Chinese consumers, whose appetite for branded goods fueled a luxury industry rebound over the past two years.

Shares in LVMH closed down 7.1 percent, even though it reported a stronger-than-expected performance in the clothing and leather goods business that includes its biggest profit-driver, Louis Vuitton, and labels like Christian Dior.

The company played down any signs of weaker demand, telling analysts it had observed "a little slowdown" among Vuitton's Chinese clientele in the July to September period, with sales growth around 15 percent rather than closer to 20 percent.

But investors are already looking to the months ahead, anticipating a sharper deceleration that would make the highly-valued stocks of the luxury sector less attractive.

"The key debate was not going to be around third quarter sales growth, but rather around the exit rate from the third quarter, the confidence on the fourth quarter and the 2019 outlook," analysts at Deutsche Bank said.

Shares in Gucci-owner Kering , LVMH's cross-town rival, closed down 9.6 percent. Stocks in French handbag maker Hermes , Britain's Burberry (OTC: BRBY) and Italian puffer jacket firm Moncler were also hit, and fears spread across the Atlantic with the likes of Tiffany (NYSE: TIF) and even less expensive players like Michael Kors (NYSE: KORS) suffering.

Executives at LVMH did not comment on current trading trends, or on the potential effects of the trade war that could hit two of its biggest clienteles. Chinese consumers account for about a third of all luxury goods purchases worldwide.

"There is nothing particularly specific to luxury and LVMH in all that," Jean-Jacques Guiony, LVMH's financial director, told a conference call. "The world is a complicated place, currencies are playing in all directions and governments are making their lives and our life more difficult sometimes."

'SELL THE NEWS'

Falls in the yuan have also added to market concerns that Chinese shoppers will lose purchasing power, with many still tending to splurge on goods on overseas trips.

"I think the market is in 'sell the news' mode, anticipating a looming slowdown due to the trade war," a trader in Geneva said.

Many luxury goods companies are trading above their average valuations of the last 12 months, after a rally fueled by rebounding sales in the past two years.

Morgan Stanley downgraded European luxury industry shares to "underweight" on Wednesday as a result.

Still, Chinese demand is not expected to disappear overnight, and some analysts said market concerns were overdone.

Young, middle-class and tech-savvy shoppers in the country are now fuelling the bulk of sales, rather than the business-related purchases that were the target of a government crackdown on high-end gift-giving and corruption in 2012.

"The propensity to buy luxury goods from the Chinese customer is higher than it is anywhere else in the world," LVMH's Guiony said. Clients there tended to invest more of their income into high-end wares, though that did mean they could sometimes be more susceptible to economic ructions, he added.

Europe's big luxury conglomerates have been among the biggest winners in the industry upturn so far, helped by their wide-ranging stable of brands.

"LVMH and Kering have had fantastic numbers in the past years - even if today's numbers are still good, the market was hoping that the past outstanding growth trend would extend a few years longer," said Pierre Willot, fund manager at Paris-based Montaigne Capital.

(Reporting by Sarah White, Pascale Denis, Danilo Masoni, Sudip Kar-Gupta and Blandine Henault; Editing by Jan Harvey and Mark Potter)

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