Europe's big luxury companies could come under increasing pressure in 2019 as a result of a slowing Chinese market, a weak yuan and the ongoing trade dispute between the U.S. and China.

Worries about Chinese consumption growth intensified Jan. 2 when Apple Inc. cut its fiscal 2019 first-quarter revenue forecast due to weaker-than-expected iPhone sales, primarily in Greater China, causing a 10% drop in Apple's stock price with a knock-on effect on the share prices of several major luxury brands. Soon after, the chairman of the White House Council of Economic Advisers warned that a "heck of a lot" of U.S. companies could face weaker earnings in the new year as a result of the U.S.-China trade spat.

Large luxury companies may be especially vulnerable because they derive about one-third of their revenue from Chinese consumers. Several of the biggest players have already flagged signs of declining confidence among Chinese consumers. In addition, Chinese authorities are cracking down on travelers returning home after purchasing luxury items overseas, including imports that exceeded the duty-free limit.

On Oct. 10, 2018, LVMH Moët Hennessy Louis Vuitton SE's shares dropped more than 7% after it said sales growth in China fell from the high-teens to the mid-teens. Shares of other companies including Kering SA, Hermès International Société en commandite par actions and Burberry Group PLC also tumbled. On Nov. 9, Richemont said its China sales had "normalized" to high single-digit growth from the double-digit growth it previously enjoyed. On Nov. 28, shares of Tiffany & Co. took a hit after it reported lackluster third-quarter results partly as a result of what it described as "lower spending by foreign tourists, primarily Chinese."

Until 2013, the luxury market grew at a steady 8%-10% clip every year, but that growth rate has since leveled off to 6%-8%, according to Boston Consulting Group. "It's still very healthy but it's a change," said Olivier Abtan, partner and managing director at BCG, who leads the firm's coverage of the global luxury sector, in an interview with S&P Global Market Intelligence. "In this slower-growth market, you see losers and winners. In the past, you only saw winners."

Consequently, investors are less upbeat about the prospects of luxury good makers: The MSCI Europe, Apparel and Luxury Goods Index, which tracks the stock prices of large and mid-cap stocks across 15 countries, fell by more than 20% between Sept. 2, 2018, and Jan. 2.

In a research note on Chinese luxury spending published Dec. 4, analysts at UBS said they expected a "soft landing" in 2019 to about 10% growth, down from about 15% in 2018. A key issue is spending by Chinese tourists. "Chinese spend overseas is already slowing with Hong Kong spending weaker than [mainland China] and forward tour bookings into Europe and the U.S. seen as growing just mid-single digit year on year in the next few months," the analysts wrote.

In Hong Kong, retail sales of jewelry, watches and valuable gifts dropped to less than HK$6 billion in November 2018 from more than HK$8 billion in January, according to figures compiled by the Hong Kong Census & Statistics department.

In 2018, the overall luxury market, including both luxury goods and services, grew by 5% at constant exchange rates to about €1.2 trillion, according to a study by Bain & Co. in collaboration with Fondazione Altagamma, the Italian luxury goods manufacturers' industry foundation. Of this, personal luxury goods grew at 2% in euro terms, or 6% at constant rates, to reach €260 billion, the same rate as in 2017. That growth, at constant rates, is expected to continue at 3%-5% per year through 2025 to reach €320 billion-€365 billion, led by Chinese demand, the rise of online shopping and the influence of millennial and younger shoppers. "However, socio-political issues, commercial policies and potential short-term soft recessions could make this road to growth a bumpy one in the short term," Bain concluded.

Some of those factors are already playing out as a declining property market and disappearing investment gains mean that many Chinese consumers have less income to use for high-end purchases. The Shanghai Composite Index has lost about a fifth of its value since hitting a high in January 2017, and the domestic property market could tip into a recession in 2019, according to a report by China International Capital Corp. On Oct. 30, 2018, the yuan hit a 10-year low relative to the U.S. dollar, a decline that dents the purchasing power of Chinese consumers buying luxury products overseas.

However, some companies believe they will benefit as more Chinese purchase luxury goods in their own country rather than when traveling abroad. Bain forecasts that by 2025, Chinese consumers will make up at least 45% of the luxury market, up from 32% in 2018, and they will make half of their luxury purchases at home in China. In recent months, demand in mainland China has been lifted by the repatriation of funds due to a weakening yuan, import tariff cuts in July and a clampdown by Chinese authorities that restrict how many luxury goods consumers can bring home from overseas.

That has a particularly big effect in Europe, where tax-free shopping has been one of the biggest drivers of growth in the luxury industry and Chinese tourists have been the biggest spenders, making nearly 30% of all tax-free purchases. Tax-free sales in Europe fell 6% in the first nine months of 2018 compared to the year-ago period, according to Global Blue, a tourism shopping tax refund company. For the same period, the declines were 8% in Italy, Spain and the U.K., and 13% in Germany. France showed an increase of 1%.

Olivier Abtan of BCG says companies that offer "timeless luxury" will keep doing well. Demand for Hermès products seems to stay resolutely strong even when economic fortunes dip. And the Chinese consumer will remain the main driver of the fortunes of luxury companies. "According to our estimate, Chinese consumers represent 32% of the luxury sector today and they will represent 40% in five years," Abtan said.

The short term outlook is cloudier. In a recent call with analysts to discuss fiscal first-half earnings, Burkhart Grund, CFO of Richemont said: "We're quite happy with Chinese domestic demand because it's quite stable and it's expanding. And it's expanding across our different product segments." On Jan. 11, the owner of Cartier and Van Cleef & Arpels jewelry will become the first major luxury house to update the market this calendar year when it reports earnings for the quarter ended Dec. 31, 2018.

In a research note published Jan. 7, analyst Francesca Di Pasquantonio of Deutsche Bank said she expects Richemont to report "a deceleration" of sales growth to 6% from 8% in the first half, calculated at constant currency rates and excluding the consolidation of online distributors.

Di Pasquantonio added: "The company is bound to have suffered from its relatively large exposure to France and the softer hard luxury sales trends in Greater China, though we expect the U.S. to have provided support. This suggests some downside risk to expectations."