Last checked at 
* LVMH shares at lowest since May
* Burberry shares hit lowest in 8 months
* Stocks valuation premium down 30pp to 74% from August peak
* $120 billion wiped off the sector in two days
* President Xi Jinping plans wealth redistribution
* China's factory activity slows in August
By Joice Alves
LONDON, Sept 20 (Reuters) - China's stuttering economic
recovery and plans to redistribute wealth threaten to derail
Europe's booming luxury sector, leaving many investors
apprehensive about buying the stocks even after their sharp
August sell-off.
Demand for high-end products in the world's most populous
nation is the main driver for the sector, accounting for a third
of European luxury goods makers' sales in 2019 and 28% in 2020,
according to UBS analysts.
Around $120 billion was wiped off the sector including Louis
Vuitton owner LVMH, Burberry, and Gucci owner
Kering in just two days last month after Chinese
President Xi Jinping unveiled plans for "common prosperity".
Several analysts used the slide to recommend investors bet
that luxury stocks' heady resurgence from COVID-19, which saw
the European sector rise 140% from March 2020
to its Aug. 12 peak, would resume.
However, Chinese economic data and supply chain problems
caused, in part, by new local coronavirus outbreaks braked the
sector's rebound from August lows, triggering a second sell-off.
In just one month the luxury sector's valuation premium has
fallen 30 percentage points to 74% from its August peak compared
with the broader MSCI Europe index, according to UBS.
Some analysts warn that the appeal of companies such as
Hermes, whose Birkin handbags sell for $10,000-plus
and often have waiting lists, will take a serious hit if China
pushes on with its plan to tax the rich and implement a campaign
against tax avoidance.
High-end sales could be hit "if higher taxes were introduced
on income, wealth, property or consumption", said Thomas
Chauvet, head of luxury goods equity research at Citi in London.
Chinese consumers could become "reluctant to buy luxury
goods if they are worried about the taxman coming to see them",
said Jon Cox, head of European Consumer Equities at Kepler
Cheuvreux. "This is probably going to have a negative impact on
performance of some of these companies."
Kepler estimated higher taxes for the rich could lead to a
decline of between 10 to 25% in sales in China, hitting global
luxury demand, which is unlikely to be offset elsewhere. That
could lead to sector stagnation for one to two years, Kepler
added.
Others are cautiously optimistic.
Aneta Wynimko, portfolio manager at Fidelity International,
said her fund retains conviction in European luxury companies
but is monitoring developments in China carefully, as they "are
difficult to predict as many recent events have shown".
"We are mindful of a possible change of sentiment of
consumers towards the luxury segment," she said, adding that
Fidelity is not too worried about a spending power crash, as it
seems the regulation being announced supports middle class
growth.
Barclays upgraded the sector to overweight, citing the
recent sharp underperformance.
UBS said the heavy de-rating implies that short-term China
uncertainty has been priced in. There is a "good buying
opportunity for high quality names", it said, mentioning
Richemont, whose shares were down 9% since its August
peak.
Historically, on the back of potential concerns about a
Chinese slowdown, the sector de-rated versus the MSCI Europe
Index on average between 15 and 30 percentage points in line
with the recent repricing, UBS analysts calculated.
They expect China's tax adjustments to be "modest and
gradual", limiting an imminent negative impact on the sector.
(Reporting by Joice Alves, additional reporting Danilo Masoni;
Editing by Rachel Armstrong and Emelia Sithole-Matarise)
