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Economics & Markets

Why a ‘revenge buying’ ramp up is one to watch for investors

By Diana Mousina
Economist - Investment Strategy & Dynamic Markets Sydney Australia

China was the first country into the pandemic and out of it, so its patterns can be indicative of what’s to come for the rest of the world. Early indications of an uplift in consumer spending is good news in this sense, as pent up demand finds its outlet.

What is ‘revenge buying’?

The term ‘revenge buying’ was originally used to describe the spending boom following the end of the Cultural Revolution in China in 1976. In the current context, it can be used to describe indulgence in spending post-lockdown.

Why does it matter?

Consumer spending is a substantial indicator to track, accounting for nearly 60% of China’s gross domestic production in 2019. It is also a substantial contributor to growth in advanced economies.

A relaxation of shutdowns, including the opening of shopping malls, has seen consumer spending pick up in China. There is even some evidence surfacing that consumers are indulging in their purchases, including on high-end branded handbags and shoes. The Hermes flagship store in Guangzhou reportedly had US$2.7 million1 in sales on its first day of reopening – a record for a single-day sale at a luxury outlet in China.

Chinese consumers represent approximately 33% of the global market for luxury goods2, worth more than US$120 billion in high-end merchandise. The world’s largest spenders on luxury items is expected to grow to 41% market share by 2025, US$173-183 billion worth of luxury items.

China is one of the first countries to restart trading, given the country was the first to experience an epidemic, and is months ahead in terms of controlling COVID-19 cases and resuming normal business activity. The pace of economic recovery in China could provide the rest of the world with an indication of how quickly consumer appetite and economic activity could return to pre-COVID-19 levels.

It’s important to remember here that a lack of spending during lockdown isn’t solely due to people being more careful with their money, or not having the money to spend, it’s also because they simply couldn’t spend. With that in mind, re-opening of domestic economies means that pent-up demand can be released.

Are there risks to growth?

While the bounce in sales has been encouraging in China, consumer traffic remains soft generally and below pre-COVID-19 levels. It’s fair to assume that other advanced economies will follow suit, and not immediately bounce back to pre-COVID-19 levels.

In relation to China specifically, while industrial production activity appears to have picked up pace, exports orders are at risk of remaining weak, given its main trading partners, like the US, are still battling the pandemic whilst unemployment rates remain high. So, while the initial data is looking positive, a sustained pick-up in consumer demand in China is still in the early phase of recovery.

Geopolitical tensions, which are happening along trade lines, are also one to watch. The US-China trade war in previous years was a big contributor to market performance, and tensions of this nature continue to have an impact.

Further, for all economies making their way out of the pandemic, the advent of a second wave is a risk and would be damaging to economic recovery prospects. Of the countries AMP Capital is monitoring, it appears only Iran had had a true second wave. Other countries, like Japan and Singapore, never quite got their case numbers down – or “flattened the curve” – as we’ve come to know it.

For more on this, you can view Diana Mousina’s webinar

1 Bloomberg and WWD Fashion: https://www.bloomberg.com/opinion/articles/2020-04-17/for-bernard-arnault-s-lvmh-it-s-too-early-to-open-the-champagne; https://wwd.com/fashion-news/fashion-scoops/hermes-hauled-in-2-7-million-in-one-china-store-on-saturday-sources-1203559738/
2 Bain & Company, What’s Powering China’s Market for Luxury Goods?, 2019
3 Boston Consulting Group and Tencent, China Luxury Digital Playbook, June 2019

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While every care has been taken in the preparation of these articles, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in them including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. Performance goals are merely goals. There is no guarantee that the strategy will achieve that level of performance. The information in this document contains statements that are the author’s beliefs and/or opinions. Any beliefs and/or opinions shared are as at the date shown and are subject to change without notice. These articles have been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. They should not be construed as investment advice or investment recommendations. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.

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