While European luxury businesses may have shone at Paris Fashion Week, investors are now hesitant to purchase the shares in light of the Chinese slowdown and uncertain interest rates.
The STOXX Europe Luxury 10 index, which began 2023 in style on expectations of a quick recovery in Chinese sales following three years of lockdowns and the post-pandemic U.S. spending spree showing little signs of slowing down, has now had its largest quarterly decline since 2020.
Since the end of March, the value of those ten stocks has fallen by around $175 billion due to China’s sluggish development and shaky recovery, as well as high inflation and rising interest rates that are making American consumers tighten their belts.
According to Bernard Ahkong, co-CIO at UBS O’Connor Global Multi-Strategy Alpha, “the industry has de-rated dramatically in the recent 2-3 months as a result of a combination of rising interest rates, investor positioning, and in anticipation of profit reduction.
Even while the “Big 10” index for luxury is still up 20% year over year, the third quarter witnessed the STOXX 600’s worst quarterly performance ever, down 2.5%.
Ahkong noted growing worries about the prospects for luxury expenditure in the U.S., Europe, and China. Peter Garnry, head of equities strategy at Saxo Bank, shared this opinion.
“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 stated.
As several of the biggest European luxury businesses disclose their quarterly sales in the coming weeks, beginning with LVMH on October 10, it may become obvious just how terrible things appear to be.
The luxury divide
Luxury valuations are remain significantly higher than the rest of the market, notwithstanding a decline. According to LSEG statistics, Richemont’s and LVMH’s 12 month forward price-to-earnings ratios are respectively approximately 15.6 and 21. This compares to the STOXX 600’s ratio of roughly 12.
However, Danish pharmaceutical company Novo Nordisk dethroned LVMH as the most valuable listed business in Europe this month, a sign of how their lustre has faded.
Investors’ declining interest in luxury equities and the expansion of Novo’s anti-obesity products were cited as major factors in the French luxury group’s 2-1/2 year reign coming to an end.
Some analysts are now more apprehensive about the luxury market; UBS last week reduced their projections to take into account the possibility of sluggish Chinese demand.
Luxury goods earnings-per-share estimates were reduced by 6% by Morgan Stanley and 7% by Bank of America for 2024. According to the report, consumers in the US and Europe were spending less than they had before the outbreak.
The United States’ premium fashion purchasing declined 16% year over year in July and August, according to credit card statistics.
In May, according to Gerry Fowler, head of European equity strategy and global derivative strategy at UBS, risks in luxury stocks began to surface.
But as he continued, “We’re not certain that earnings momentum has yet peaked.
SECRET JEWELS?
Although the general perception has shifted towards caution, a few of market participants and analysts continue to be upbeat in the long run.
According to Bernstein analysts, “the sector correction has been overdone,” and businesses like LVMH that are investing in marketing and holding off on price rises are best positioned to weather an uncertain economic climate.
Due to exorbitant valuations early in the year, Gilles Guibout, head of European equities strategies at AXA Investment Managers, was wary; nevertheless, he is now expressing interest.
Prior to today, it was generally accepted that fancy names were used as a cover. That was another factor in why we weren’t really eager to be overweight at the start of the year, he added.
Guibout finds the industry more interesting given that valuations are closer to long-term averages, even though he has maintained the underweight rating he has had since the start of 2023.
“We will wait for the quarterly results, which should confirm that there has been a slowdown,” he stated.