Europe’s luxury brands may have shone at Paris Fashion Week, but investors are questioning their taste for stocks in the face of a Chinese slowdown and interest rate uncertainty.
The STOXX Europe Luxury 10 index (.STXLUXP) has just suffered its biggest quarterly fall since 2020, with hopes of a rapid rebound in Chinese sales after three years of closure and the post-pandemic US spending boom showing few signs of abating.
Some $175 billion has been wiped off the value of these 10 stocks since the end of March, as China’s recovery is rocky and growth is slowing, while high inflation and rising interest rates are forcing U.S. shoppers to tighten their purse strings.
“The sector has sold off sharply in the last 2-3 months due to a combination of rising interest rates, investor positioning and anticipation of earnings cuts,” said Bernard Ahkong, co-CIO of UBS O’Connor Global Multi-Strategy Alpha.
Although the “Big 10” luxury index is still up 20% year-on-year, the third quarter was the worst quarterly performance on record compared to the STOXX 600 (.STOXX), which fell 2.5%.
Ahkong pointed to growing concerns about the outlook for luxury consumption in the US, Europe and China, a view echoed by Peter Garnry, head of equity strategy at Saxo Bank.
“The recent decline in European luxury stocks reflects the uncertainty over the European economy and also the uneven growth outlook for the Chinese economy,” Garnry said.
Just how bad things look may become clearer in the coming weeks when several of Europe’s biggest luxury groups report quarterly sales, starting with LVMH (LVMH.PA) on 10 October.
Although luxury valuations have come down, they are still well above the rest of the market. LVMH’s 12-month forward price-to-earnings ratio is about 21 and Richemont’s (CFR.S) is 15.6, compared with about 12 for the STOXX 600, LSEG data show.
But in a sign of how its star has dimmed, Danish drugmaker Novo Nordisk (NOVOb.CO) last month unseated LVMH (LVMH.PA) as Europe’s most valuable listed company.
The end of the French luxury group’s 2-1/2-year reign was widely attributed to investors losing their appetite for luxury stocks, as well as the growth of Novo’s anti-obesity drug Wegovy.
Some analysts have turned cautious on the luxury sector, with UBS last week cutting its estimates to reflect the risk of a slowdown in Chinese consumption.
Morgan Stanley slashed its 2024 earnings per share estimate for luxury goods by 6%, while Bank of America cut its forecast by 7%. It said shoppers in the United States and Europe were spending less than they had after the pandemic.
Credit card data from the United States showed that spending on luxury fashion in July and August was down 16% on the same period last year.
Gerry Fowler, head of European equity strategy and global derivatives strategy at UBS, said the risks to luxury stocks became more apparent in May.
“But we’re not sure that earnings momentum has bottomed yet,” he added.
Although the consensus has become more cautious, several market participants and analysts remain optimistic for the long term.
“The sector correction is over,” said analysts at Bernstein, adding that companies like LVMH that spend on marketing and moderate price increases are best placed in an uncertain economic environment.
Gilles Guibout, head of European equity strategies at AXA Investment Managers, was cautious at the start of the year because of high valuations, but is now showing interest.
“Until now, luxury names were seen as a place to hide, it was really a consensus. That was why we were not so keen to be overweight at the beginning of the year,” he says.
With valuations now closer to long-term averages, the sector is more compelling for Guibout, although he is sticking with the underweight he has held since the start of 2023.
“We will wait for the quarterly results, which should confirm that there has been a slowdown,” he said.
