Have the recent economic woes in Asia dampen luxury spending trends?

The recent global rout in financial markets, following the May 22, 2013 congressional testimony by US Federal Reserve (US Fed) Chairman Ben Bernanke that monetary easing policies are about to taper soon, to the recent volatility in China’s interbank lending rates have caused a lot of jitters among many market participants, and several large funds have pulled out most of the major portfolio holdings out from Asia sending several Asian financial markets tumbling to new lows, along with some Asian stock indices seeing its earlier gains ‘evaporated’ and ended up in bear territory levels, and well off from its peak 2013 performances.

Given the various gyrations seen in the financial markets seen previously, we are now starting to witness some calm returning to the markets following the various US Fed Presidents’ recent comments that loose monetary policies are not about to end soon, and China’s monetary policy makers are trying to engineer growth through a cutoff of lending flexibility to the ‘shadow’ banking system, while ensuring that lending is being done to the appropriate groups, namely small and medium sized enterprises (SMEs), and education where most educators and parents have expressed their utmost concerns over saving for college tuition, grants and scholarships offered. The US economy is recovering quite well, and some of the greatest beneficiaries during the recent increasing trend in housing prices are expected to be the the homeowners, bankers, mortgage brokers, etc.

As for the Asian luxury spending trends, it was quite steady based on the initial analysis from a Bloomberg.com report dated June 25, 2013 that one of the leading market researchers, Bain & Co. had estimated that luxury spending trends across the world, including Asia, are not expected to change much as Asian luxury shoppers continue to look for exquisite and glamour associated with the luxury items they currently own. The Asian luxury shoppers are so far been resilient in the face of the stock turmoil happening across the Asia-Pacific region, as seen by a recent Bloomberg.com news article report dated June 25, 2013 that indicated that Chinese luxury shoppers formed the bulk of customers patronising Harrods London store, followed by visitors from Singapore, Thailand, and Nigeria. The Americans who used to form the bulk of the luxury spenders have been placed out of favour from the list of top ten overseas customers due to the growth seen by many in the mineral and oil-rich nations (Singapore is the exception as the country does not have any significant natural resources).

However startling the statistical figures are, it does not come with much surprise for many as the data could be outdated, and although luxury spending is a good indicator of the direction of the stock markets, it does not provide any forward looking projections of economic growth, and general direction of the various asset markets. The Bloomberg article mentioned about one of the main drivers of the luxury spending growth has been from the mineral, resources, and mining booms across many natural resource-rich nations such as the Middle-East, Australia, North America, etc., but with commodity prices taking a tumble, most notably the multi-year lows seen in the price of gold (Averaging USD 1,200 per ounce as of Asian trading hours on June 28, 2013), luxury spenders from these countries might not show up as the top 10 shoppers at Harrods London for next year, or perhaps at the end of this year. In addition, given the severity of the Chinese economic slowdown, coupled with the recent volatilities seen in China’s credit markets, Chinese consumers might not have the sufficient luxury spending power to drive overall growth in this space.

With all the doom and gloom projections, the question is how will luxury spending in general being impacted by the various gyrations seen in the financial markets. One of the major Asian countries that anyone could hope to look out for continuing trends in luxury spending, to my knowledge, might be the Japanese luxury consumers. The Japanese luxury consumers have long been customers of major European brands, including Prada, and LVMH, etc. Recent domestic Japanese spending trends have been lacklustre. However, Primer Minister Shinzo Abe, and his own brand of Abenomics, which many market observers have expressed various scepticism, has now seen some improvements as recent robust industrial production, unemployment figures, inflation, and retail spending figures have shown (Reference to economic data released this morning, Tokyo time, on June 28, 2013). If Abenomics could be seen as a major driver for Japan’s economic growth, Japanese luxury spenders could be returning to the overseas markets soon, but the ‘Three arrows’ policy (Monetary, Fiscal, and Structural reforms) have not fully kicked in yet, so it is hard to tell at this point whether Japanese luxury spenders could overtake Chinese luxury spenders.

In closing, the overall trend in overseas luxury spending coming from Asia has faced various challenges due to economic issues happening domestically. In general, most market observers believe that Asia will soon overtake the Americans and Europeans in the race for economic growth. Therefore, overseas luxury spending might continue to be show signs of growth in the long-run. The pace of growth in Asia has not diminished a lot for the past few years, whereas economic growth in both United States and Europe continue to be in the teens in terms of overall Gross Domestic Product (GDP) growth. However, over the short period of time, it might not be long that Harrods London will see much continuing growth in overseas shoppers coming from Asia due to the various economic issues being outlined in this article.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc