Analysts at Goldman Sachs upgraded their recommendations on LVMH and Kering on January 18, despite continued concerns over slowing growth in China, a major source of sales for high-end brands in the past few years.

LVMH has been upgraded to “buy” from “neutral” and Kering, the group behind Gucci and Saint Laurent, has been upgraded to “neutral” from “sell”.

The upgrades have given a helping hand to shares as the sector has been affected over sales concerns in Hong Kong, in particular, whose luxury malls were once a magnet for shoppers from mainland China.

However, Goldman still expects luxury sales growth to slow in China and forecast Chinese luxury spending to increase 6% in 2016, down from 10% in 2015, as analysts believe the market has under-estimated the “cash generative nature” of the sector.

Goldman has also highlighted a number of developments in China, which will provide both a challenge and an opportunity for luxury goods companies. Chinese consumers, particularly a newer breed of middle-class luxury consumer, are said to still contribute more than 50% of overall growth in the sector.

This emerging category of consumers has a strong desire for “status” luxury brands, even though their ability to spend is lower than the country’s ultra rich. According to the analysts, companies will have to look at selling “affordable luxuries” to this class of consumer, which has an annual disposable income in the range of US$30,000–65,000 a year.

The economic slowdown, the Chinese government’s anti-corruption measures and the fact that Chinese consumers are spending more abroad have led luxury brands to review their retail strategy in China. Read more here.

Source: Financial Times