The Uncertain Future of Europe’s Luxury Stocks
Investors Question Europe’s Luxury Stocks Amid Chinese Slowdown and Interest Rate Uncertainty
LONDON/PARIS – Europe’s luxury brands may have dazzled at Paris Fashion Week, but investors are now questioning their taste for these stocks. The sector faces challenges due to a Chinese slowdown and uncertainty surrounding interest rates.
Challenges for Luxury Brands
Europe’s luxury brands started 2023 on a high, with hopes of a rapid boost in Chinese sales and continued growth in the post-pandemic U.S. market. However, the STOXX Europe Luxury 10 index has recently experienced its largest quarterly decline since 2020.
Since the end of March, the value of these 10 stocks has plummeted by $175 billion. China’s recovery has been rocky, with growth slowing down. Additionally, rising inflation and interest rates are causing U.S. shoppers to tighten their purse strings.
Bernard Ahkong, co-CIO at UBS O’Connor Global Multi-Strategy Alpha, explains, “The sector has de-rated sharply in the last 2-3 months, due to a combination of rising interest rates, investor positioning, and in anticipation of earnings cuts.”
Concerns Over Luxury Consumption
The luxury sector’s “Big 10” index is still up 20% compared to the previous year. However, the third quarter marked its worst performance on record relative to the broader market, which saw a decline of 2.5%.
Experts express rising concerns about the outlook for luxury consumption across the U.S., Europe, and China. Peter Garnry, head of equity strategy at Saxo Bank, states, “The recent decline in European luxury stocks reflects the uncertainty over the European economy and also the uneven growth outlook for the Chinese economy.”
Upcoming Sales Reports
Several major European luxury groups are set to release their quarterly sales reports in the coming weeks. LVMH, the world’s largest luxury conglomerate, will kick off the reporting season on October 10th.
Valuations and Rankings
While luxury valuations have decreased, they still remain significantly higher than the rest of the market. LVMH’s 12-month forward price-to-earnings ratio stands at around 21, compared to about 12 for the STOXX 600, according to LSEG data.
Despite this, Danish drugmaker Novo Nordisk replaced LVMH as Europe’s most valuable listed company last month. This shift was attributed to investors losing interest in luxury stocks and the success of Novo’s anti-obesity drug, Wegovy.
Caution and Reduced Forecasts
Some analysts have become more cautious about the luxury sector. UBS recently reduced its estimates to account for the risk of slowing Chinese consumption. Morgan Stanley and Bank of America have also revised their earnings-per-share forecasts for luxury goods, citing decreased spending by U.S. and European shoppers.
Credit card data from the United States reveals a 16% year-on-year decline in luxury fashion spending in July and August.
Gerry Fowler, head of European equity strategy and global derivative strategy at UBS, highlights that risks in luxury stocks became apparent in May. However, he adds, “But we aren’t sure that earnings momentum has yet troughed.”
Optimism for the Long-Term
While consensus has turned more cautious, some market players and analysts remain optimistic about the long-term prospects of luxury stocks.
Analysts at Bernstein believe that the sector correction has been excessive. They argue that companies like LVMH, which are investing in marketing and easing up on price increases, are best positioned in an uncertain economic environment.
Gilles Guibout, head of European equity strategies at AXA Investment Managers, was initially cautious due to high valuations. However, he has now become more interested in the sector as valuations approach long-term averages.
Guibout states, “Up to now, luxury names were seen as a place to hide, it was really consensual. That was also the reason why we were not so keen to be overweight at the beginning of the year.”
He plans to wait for the quarterly results to confirm if there has been a slowdown in the luxury sector.
