LONDON/PARIS (Reuters) – European luxury brands may have shone during Paris fashion week, but investors are questioning their appetite for the sector in the face of the Chinese slowdown and uncertainty over exchange rates. interest.
Luxury has started 2023 strong thanks to hopes of a rapid recovery in sales in China after three years of health restrictions and a rebound in post-pandemic spending in the United States, but the STOXX Europe Luxury Index 10, which brings together the 10 largest European companies in the sector such as LVMH, Kering or Richemont, has just recorded its largest quarterly decline since 2020.
Some $175 billion has been removed from the index since late March as China’s recovery falters and growth slows, while high inflation and rising interest rates force U.S. consumers to cut spending.
“The sector has depreciated sharply over the last two or three months, under the combined effect of rising interest rates, investor positioning and anticipation of profit cuts,” said Bernard Ahkong , co-head of UBS O’Connor Global Multi-Strategy Alpha.
Although the STOXX Europe Luxury 10 is still up 20% year-on-year, it recorded its worst performance in the third quarter compared to the STOXX 600, which fell 2.5%.
Among the reasons for this decline, Bernard Ahkong cites growing concerns about the outlook for luxury goods consumption in the United States, Europe and China, a view shared by Peter Garnry, head of equity strategy at Saxo Bank.
“The recent decline in European luxury stocks reflects the uncertainty of the European economy and the uneven growth prospects of the Chinese economy,” he said.
The seriousness of the situation could become clearer in the coming weeks, when several of Europe’s biggest luxury groups publish their quarterly sales, starting on Tuesday with LVMH.
THE LUXURY GAP
Although luxury valuations have fallen, they remain well above those of the rest of the market: LVMH’s 12-month price-to-earnings ratio is around 21 and that of Richemont is 15.6, compared to around 12 for the STOXX 600. , according to LSEG data.
However, a sign of the decline of the sector’s star, last September the Danish drug manufacturer Novo Nordisk dethroned LVMH from its place as the largest market capitalization in Europe, which the French luxury group had occupied for two and a half years.
The end of LVMH’s reign has been widely attributed to investors’ loss of appetite for luxury stocks as well as the success of Wegovy, Novo Nordisk’s weight-loss drug.
Some analysts have been cautious about luxury, with UBS lowering its estimates last week to take into account the risk of a slowdown in Chinese consumption.
Morgan Stanley cut its earnings per share estimate for luxury goods by 6% in 2024 and Bank of America by 7%, the latter specifying that consumers in the United States and Europe were spending less than during the period post-pandemic.
Spending on luxury fashion fell 16% from a year earlier in July and August in the United States, credit card data shows.
Risks in luxury stocks started to become more evident in May, according to UBS analyst Gerry Fowler.
“But we are not sure that the earnings momentum has run out of steam yet,” he added.
LONG-TERM OPTIMISM
Although the outlook is more mixed, several market participants and analysts remain optimistic in the long term.
“The sector correction has been too big,” Bernstein analysts said, adding that companies like LVMH that spend on marketing and relax their price increases are best placed in an uncertain economic environment.
Gilles Guibout, head of European equity strategies at AXA Investment Mangers, who was cautious at the start of the year due to high valuations, but is now taking an interest in the sector.
With valuations now closer to long-term averages, the sector is more interesting, believes Gilles Guibout, even if he has stuck to the “underweight” rating since the start of 2023.
“We will wait for the quarterly results, which should confirm the slowdown,” he said.
(Reporting Lucy Raitano and Mimosa Spencer; French version Diana Mandiá, editing by Kate Entringer)
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