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Is It Time to Cash Out of Global Luxury Stocks?

Global luxury stocks have surged in the first-half of the year, driven higher by investor optimism over company earnings as well as rising demand from consumers in emerging markets.

A man walks past a billboard outside a shopping mall housing luxury brands in Shanghai.
Phillippe Lopez | AFP | Getty Images
A man walks past a billboard outside a shopping mall housing luxury brands in Shanghai.

However, growing concerns over a further slowdown in global growth, particularly in the world's second-largest consumer of luxury products China, is putting into question whether the gains can be sustained.

Italian Fashion house Prada, listed in Hong Kong, has seen its stock surge 45 percent year-to-date, while Michael Kors' NYSE-listed shares have risen over 50 percent this year.

Eddie Tam, who runs the Asia-focused hedge fund Central Asset Investments, tells CNBC that there is not much upside left for the stocks, given their demanding valuations and worries over the state of the global economy.

“We are starting to go short some of the global luxury retail plays – most of them are U.S. or Europe based,” Tam said.

The China Factor

Tam, who is based in Hong Kong – a popular destination for Chinese shoppers – says he is seeing signs of a slowdown in luxury spending.

“High-end shopping districts such as Ocean Terminal (in Hong Kong) are seeing slower footfalls, compared to a year earlier,” he said.

“Even Mercedes dealerships in China are having a tough time moving inventory, they are selling cars at a discount to move their stocks,” he added.

Out of the global luxury plays, Tam says he has turned bearish on those brands banking on high growth in China - such as Prada and American luxury label Coach .

Prada listed in Hong Kong in June 2011, while Coach, which is also listed in the U.S. debuted in December. The latter's shares in Hong Kong have risen 23 percent this year.

“Companies like Coach, which say that their growth strategy depends on Asia are dangerous (particularly) as Asia, China slow,” Tam said.

He notes that Prada, which is commanding a high premium is also vulnerable to steep falls. Shares of Prada are currently trading at a price-to-earnings ratio of 20 – much higher than peers such as Paris-based PPR, owner of brands such as Gucci and Yves Saint Laurent, which is trading at 12 times forward earnings.

“Even one negative catalyst, like a negative earnings surprise, could make them (the shares) fall,” he added, citing shares of London-listed Mulberry , which fell as much as 25 percent earlier this month, after its earnings missed estimates.

There is potential for the second quarter earnings of luxury companies to disappoint, he added, which could send their stocks falling 10-20 percent within days.

Daniel So, Securities Strategist at Sun Hung Kai Financial agrees that Prada’s richly valued stocks are vulnerable to downside pressure.

“Current valuations have priced in sustained high growth, but there could be some disappointment in the medium-term (over the next 3-6 months),” he said, adding that his 6-month price target for the stock is HK$44 ($5.70) — a 14 percent downside from current levels.

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