A number of leading luxury groups, driven by an unexpected spike in Chinese demand, have positively surprised investors with quarterly figures exceeding expectations, auguring well for the crucial Christmas period.

The first six months of 2016 have been plagued by China's slow-down, Hong Kong's decline, decreasing tourism flows in Europe and a sluggish US market. In the third quarter however, LVMH, Kering, Dior and Hermès have performed better than expected, thanks notably to Chinese customers, who account for more than one third of the world luxury market.

The luxury brands have also benefited from massive purchases by foreign tourists in the UK, fostered by the weak pound, which compensated for France's loss in visitors due to the terrorist attacks.

"What was truly surprising is the magnitude of the improvement in Chinese demand," stated Rogerio Fujimori, analyst at RBC Capital Markets. "It is encouraging for the year-end prospects, though it cannot be called a trend," he added nevertheless.

The recovery can be explained in terms of favourable comparisons: summer 2015 was marred by the Shanghai stock market crash and the yuan's devaluation, by a greater stability in the Chinese economy, the reduction in the price differentials between Europe and Asia and the measures taken by the Chinese government to boost domestic consumption.

"Sales are accelerating in China, driven by a greater propensity to consume and by policies aimed at encouraging domestic purchases," stated on Thursday Axel Dumas, the CEO of Hermès, in a phone interview. He nevertheless added cautiously that it is "still too early to declare victory."

Psychological factors

According to Erwan Rambourg, analyst at HSBC, "a number of psychological factors which burdened the industry, such as the yuan's devaluation or the after-shocks of the November 2015 attacks in Paris, have lost weight." According to Rambourg, once the US presidential election and the anniversary of the November attacks in Paris will be behind us, the trend could improve further.

The market is characterised by limited price increases and the retail network's maturity, while the demand by the new generations is undergoing great changes. Yet the quarterly figures of two mega-brands such as Louis Vuitton and Gucci are powerfully reassuring.

According to the analysts, they bear witness to these brands' appeal and their ability to win market share. They also bide well for the profit margins of the groups concerned.

However, not all brands are in sparkling form: notably the Swiss groups Richemont (Cartier, Van Cleef & Arpels) and Swatch (Omega, Longines) continue to suffer from the troubles affecting the watch-making industry.

Some securities had been sold short by hedge funds due to geopolitical uncertainty, but thanks to the results posted by Louis Vuitton, Gucci and Saint Laurent, share prices have quickly recovered.

LVMH's share price gained approximately 13% since January, and Kering leaped by 26% while the Stoxx600 index lost 9% in the period.

Louis Vuitton, LVMH's main profit centre and the world's top luxury label, was the first to spring a surprise in early October, with an organic growth of more than 7% thanks to the Chinese recovery. It was followed by Dior, then Kering, driven by Gucci's new-found popularity, and by Hermès.

According to data by Astec Analytics, Richemont shares are instead the ones most frequently sold short, with approximately 15.4% of the stock available for loans. The share lost 12% in value since January and, together with Swatch (-17%) and Hugo Boss (-22%), it is one of the industry shares whose value has been decreasing since the start of the year.