As a China spending boom looms are these global stocks must buys?
Analysts at the Bank of America has chosen luxury fashion stocks moving from one to watch to investor must-buys as Chinese spending boom is forecast.
Millions of Chinese consumers are rushing to buy high-end fashion items and accessories online. BofA expects two stocks to benefit from this growing trend. China’s middle class already outnumbers the entirety of the US’ population, totalling approximately 700 million people. Their habits may point towards which stocks are must picks now and in the near future.
“China is the most exciting opportunity in online luxury,” BofA wrote. The bank expects Chinese shoppers to spend $48.9 billion buying luxury goods online in 2025 – four times more than was spent in 2020.
So which companies are set to benefit most from this boom? According to the George de Mendez-led analysts at the Bank of America Farfetch and Richemont are in the frame to potentially make some big gains.
The British-Portuguese brand has been dubbed a “big deal” by the bank in the past, and now it’s set to become a major juggernaut, according to BofA analysis, thanks to Chinese shopping habits. Farfetch has established a partnership with China’s e-commerce juggernaut Alibaba, and will start selling via the Tmall Luxury Pavilion, as well as on designer outlet platform Luxury Soho. Through the deal that will help Farfetch get access to a potential market of 780 million customers.
Swiss luxury conglomerate is BofA’s second pick. The Cartier owner has pumped money in Farfetch, and has also partnered with Alibaba to launch a new entity: Farfetch China.
Richemont’s Yoox Net-A-Porter online fashion business already has a partnership with Tmall and is showing impressive growth in the jewellery segment as highlighted by Bank of America.
Partnering with Alibaba is crucial here. For Western firms, it can be difficult to crack the Chinese market. As well as the economy featuring protectionist measures favouring domestic companies, Chinese consumers prefer to shop online or via so called “super apps”. It’s pretty much essential to partner with app owners to get access to markets.
With an Alibaba partnership, Farfetch gets access to its massive user base. Chinese customers will be will subsequently get access to broader selection of designer labels than what other platforms currently offer.
Farfetch currently has 3,500 brands available including Gucci, Off-White and Balmain. Comparatively, the Tmall Luxury Pavilion only stocks about 200 designers.
Yoox Net-A-Porter and Farfetch are competitors, but the Chinese deal has “multiple advantages” for all of the players, according to the BofA analysts.
Richemont already has access to the Chinese market via its Net-A-Porter Tmall Luxury Pavilion store, but the joint venture with Farfetch will give it access to a wider audience.
The renewed focus on e-commerce follows a year in which consumers were forced to shop for luxury apparel and accessories online during coronavirus lockdowns.
Bank of America said the online luxury sector had an “exceptional” 2020 and expects the global market to grow to 100 billion euros in 2025, 15 billion euros more than previous forecasts.
What about Chinese stocks?
Some Chinese stocks have great potential. The country’s rapid economic growth is nothing short of breath-taking, and several stocks have been identified as potential must buys.
Alibaba Group Holdings Limited is the largest retailer and e-commerce company in China. Alibaba operates some of the largest shopping platforms like Taobao and the aforementioned Tmall.
Very few of those investing in Chinese stocks haven’t heard of Alibaba. It is currently trading at a price over $266 per share, thanks to its cloud division becoming profitable for the first time according to its latest earnings call. Its core commercial revenues grew 38% year-on-year, Alibaba reported in January 2021, with total quarterly revenues clocking in at $33.88bn, beating market expectation.
JD is one of the biggest B2C e-commerce service providers in China and in the world in general. It’s also one of Alibaba’s chief competitors. It was represented in 85 hedge funds om 2020, with a total hedge fund holding value of $13.57bn.
Tencent is one of China’s internet kings, operating QQ, the country’s largest social media platform, as well as popular messaging services Weixin and WeChat. Over 1 billion users use Tencent’s messaging services each month, and it boasts over 500m social media users too.
Recently, its shares tumbled after nearing a $1 trillion valuation, but quickly bounced back, gaining over $230bn following listings, as mainland investors hoover up Tencent contracts on the Hong Kong Stock Exchange. Growing proliferation of smartphone users in China, thanks to its massive middle class, and higher internet penetration rates, make Tencent a very attractive prospect to Chinese and international traders.