The high-growth phase of the Chinese economy is over, say Barclays analysts

By Steve Goldstein

Two retail analysts travelled to China and came back with three downgrades

Barclays analysts downgraded Adidas, Burberry and Gucci owner Kering following a two-and-half week trip to China in which they grew more cautious on the world's number-two economy.

Analysts Wendy Liu and Carole Madjo said they went to visit brands, luxury malls, retailers, investors and other sector experts.

"The sentiment on the ground was much more cautious than 6 months ago, as there is now a clear view that the Chinese weakness is structural," they say.

They conclude the high-growth phase of the Chinese economy is over, the finance and property sector are now under pressure and are no longer viewed as cash cows, the private sector seems to be shrinking while state-owned companies are getting larger, and the boom of the tech sector is unlikely to create as many millionaires as other sectors.

In China, the view was the luxury market may take three to four years to improve. This led the analysts to downgrade their 2025 growth expectations for the luxury sector to 4% from 7%.

They cut Burberry (UK:BRBY) to underweight from equal-weight with a price target 11% below Friday's close. "To us, our trip to China clearly highlighted that Burberry is putting its luxury brand positioning at risk through promotions and high outlet exposure, which could have a long-lasting impact on its brand equity," they say, also noting it's likely to turn loss making in the first half of 2025, and the arrival of a new CEO.

Gucci continues to suffer a heavy sales decline in China, worse than peers, as it also downgraded Kering (FR:KER) to underweight with a price target 11% below Friday's close. It prefers high-quality names including Hermes, which isn't fully immune to the Chinese slowdown but may still deliver double-digit growth.

The Barclays view on sporting goods was similar. "Most brands have reported weak brick-and-mortar traffic since Q2 and our channel checks in China indicate the trend deteriorated further into the summer, not helped by the hot weather across many cities this year," they say. While the online space was "vibrant," that was due to promotions.

The analysts say Adidas (XE:ADS) margins should fall to the low-to-mid 20% range in China, from the mid-30s in the past. That led the analysts to cut Adidas's rating to equal-weight from overweight.

-Steve Goldstein

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09-09-24 0753ET

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