In recent times, Europe’s luxury brands, which had previously shone brightly during Paris Fashion Week, are experiencing a period of uncertainty as investors grapple with the challenges posed by a slowdown in the Chinese market and fluctuating interest rates.
The STOXX Europe Luxury 10 index, which had a promising start to the year amid hopes for a surge in Chinese sales after a prolonged period of lockdowns, is now facing its most significant quarterly decline since 2020. Approximately $175 billion has been wiped off the collective value of these ten luxury stocks since the end of March. This downward trend is attributed to China’s inconsistent recovery and diminishing growth, as well as the impact of elevated inflation and rising interest rates on consumer spending habits in the United States.
According to Bernard Ahkong, co-CIO at UBS O’Connor Global Multi-Strategy Alpha, the luxury sector has seen a sharp devaluation in the past few months, largely due to rising interest rates, investor positioning, and expectations of reduced earnings.
Although the luxury sector’s “Big 10” index has maintained a 20% year-on-year increase, the third quarter marked its poorest quarterly performance on record relative to the STOXX 600, which only fell 2.5%.
This uncertainty surrounding luxury consumption in the United States, Europe, and China has raised concerns, echoing sentiments from Peter Garnry, head of equity strategy at Saxo Bank, who attributes the recent decline in European luxury stocks to uncertainties in the European and Chinese economies.
Over the next few weeks, as several major European luxury groups release their quarterly sales reports, beginning with LVMH on October 10, the extent of the situation’s severity may become clearer.
Luxury valuations, while having come down somewhat, still remain notably higher compared to the broader market. For instance, LVMH’s 12-month forward price-to-earnings ratio stands at around 21, and Richemont’s at 15.6, in contrast to about 12 for the STOXX 600, according to LSEG data.
In a surprising turn of events, Danish drugmaker Novo Nordisk recently surpassed LVMH as Europe’s most valuable listed company, marking the end of the luxury group’s 2.5-year reign at the top. The shift is attributed to investors losing interest in luxury stocks and the growth of Novo’s anti-obesity drug Wegovy.
Some analysts have adopted a cautious outlook on the luxury sector, with UBS reducing its estimates to account for the potential slowdown in Chinese consumption. Morgan Stanley has trimmed 6% from its 2024 earnings-per-share estimate for luxury goods, while Bank of America has lowered its forecast by 7%, citing reduced spending by consumers in the United States and Europe post-pandemic. Credit card data from the United States indicated a 16% year-on-year decrease in luxury fashion spending during July and August.
Gerry Fowler, head of European equity strategy and global derivative strategy at UBS, acknowledges that risks in luxury stocks became more evident in May. However, he remains uncertain if earnings momentum has bottomed out.
Despite the prevailing cautious consensus, some market players and analysts maintain long-term optimism. Analysts at Bernstein believe that the sector’s correction has been excessive and highlight that companies such as LVMH, which invest in marketing and limit price increases, are better positioned in the current uncertain economic climate.
Gilles Guibout, head of European equity strategies at AXA Investment Managers, had expressed caution earlier in the year due to inflated valuations but is now expressing renewed interest. As valuations return to long-term averages, the sector is becoming more attractive. However, Guibout maintains his underweight rating, awaiting the upcoming quarterly results to confirm any signs of a slowdown.
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