A profit warning from Burberry has prompted a concerted sell-off among the global luxury sector, wiping over a fifth off the offender's market value and knocking other big luxury players by as much as 5 per cent.
For some time there has been speculation that the slowdown in China and elsewhere could hit luxury goods sales - we have rated both Burberry and Mulberry as sells for some time despite the fact there is some logic to the popular view that rising emerging markets middle class wealth will buoy luxury sales for many years to come. But the Burberry warning coupled with growing signs of economic weakness across the developing world, and particularly in China, has seriously tested this conventional wisdom and threatens the bumper ratings given to companies in the sector.
Burberry is a global brand, but China is central to its growth story as well as that of its peers. "In recent months and years, a lot of growth in relatively mature markets has been from travelling tourists," says Investec retail analyst Bethany Hocking, "If Asia Pacific slows down its luxury spending, it's felt in other regions."
As well as China's slower economic growth, the country's leadership handover could be playing a part reining in demand for luxury goods. The scandal surrounding Bo Xilai may have turned the country's tastes away from flashy shows of opulence. And falling corporate profits could be hitting the market for corporate gifts, which constitutes a noteworthy slice of the luxury market.
But while the share price reaction to Burberry's warning highlights how much potential there is for anxiety and disappointment, there is not yet enough evidence to come to a clear conclusion about the state of play. For one thing, the warning was based on just 10 weeks of trading and the details from the company were thin. It could also simply be that Asia's luxury fans are buying something other than the handbags and raincoats that Burberry is famed for. The week before Burberry's warning watch-maker Richemont reiterated its first-half guidance of 20-40 per cent profit growth. But, perhaps tellingly, it also highlighted that the five months trading it was reporting had seen "a declining month-on-month rate of growth".
