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Chinese coronavirus fear spreads over luxury, retail sectors

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Travelers pass by a health checkpoint before entering immigration at the international airport in Beijing.

Source: AP Photo

The confirmed human-to-human transmission of the new strain of coronavirus in China triggered a market sell-off Jan. 21 with luxury goods and retail stocks among those affected.

In Europe, shares of LVMH Moët Hennessy - Louis Vuitton SE were down 2.49% in early trading, while Kering SA and Compagnie Financière Richemont SA stocks were trading more than 3% lower in the morning.

Across the South Korean and Japanese markets, shares of companies spanning travel, cosmetics and retail segments that are most exposed to Chinese tourist spending also dropped.

Shares of South Korean company Amorepacific Corp., the maker of cosmetic brands such as Sulwhasoo, Laneige and Innisfree, closed down 2.67%. Japanese cosmetics conglomerate Shiseido Co. Ltd. also traded 3.87% lower.

Notably, tourism-related shares in South Korea were rallying a week ago following media reports that Chinese tour groups would be returning, ending a travel stalemate due to a dispute over the THAAD missile in 2017.

Luca Solca, Bernstein's senior research analyst for luxury goods, said the early market reaction shows that the sector is very dependent on the travel industry, especially given that Chinese tourists spend most of their luxury dollars abroad.

"Anything that disrupts travel like an epidemic, terrorist attack or war is clearly a risk factor, and the market is starting to price it at a very initial stage," Solca said in an interview.

The coronavirus, which causes pneumonia, was first reported in Wuhan on Dec. 31, 2019. It has since spread to Hong Kong, South Korea, Japan, Taiwan and Thailand. Chinese authorities confirmed Jan. 21 that the virus has caused six deaths.

The timing of the outbreak is particularly challenging given the peak traveling season ahead of the Lunar New Year on Jan. 25.

Jefferies analysts Anne Ling and Kerith Chen wrote in a Jan. 20 research note that high-traffic areas or tourist-centric stores such as cosmetic chains, shopping malls and restaurants will be affected, assuming a worst-case scenario like the outbreak in 2003 of the SARS respiratory illness.

"Hong Kong is very small and compact. Thus, any news will impact all consumers significantly and quickly. China is very big, thus at this stage only consumer sentiment in the affected cities is negatively impacted," the analysts wrote.

Solca noted that the outbreak is still at an early stage but agreed that the impact on the consumer industry would be a lot more significant should the situation worsen.

Shares of Hong Kong retail company Sun Art Retail Group Ltd. fell 7.69% Jan. 21, while stocks of popular Chinese hotpot restaurant chain Haidilao International Holding Ltd. plunged 4.17%. The Hang Seng Index closed 2.8% lower.

A director at a Chinese investment securities firm based in Hong Kong said the impact of the outbreak on the Hong Kong retail industry would be fairly marginal in the near term as the sector is still reeling from the violent anti-government protests that began in June 2019. The true scale of the impact, however, could be gauged after the Lunar New Year, he added.