While Europe’s luxury brands shone at Paris Fashion Week, investors are growing wary of luxury stock investments due to concerns surrounding a Chinese economic slowdown and fluctuating interest rates.
At the outset of 2023, luxury stocks were in high demand, driven by expectations of a resurgence in Chinese sales after years of lockdowns and sustained post-pandemic spending in the U.S. However, the STOXX Europe Luxury 10 index has recently recorded its most significant quarterly decline since 2020, shedding $175 billion in market value since March.
Several factors have contributed to this decline, including a turbulent Chinese economic recovery, decelerating growth, and mounting inflation, which have prompted U.S. consumers to tighten their purse strings. Rising interest rates and investor positioning have also played a role.
Bernard Ahkong, co-CIO at UBS O’Connor Global Multi-Strategy Alpha, observed, «The sector has experienced a sharp de-rating over the past 2-3 months, driven by a combination of rising interest rates, investor positioning, and anticipation of earnings cuts.»
While the luxury index still shows a 20% year-on-year increase, the third quarter marked its weakest quarterly performance in comparison to the STOXX 600, which declined by 2.5%.
Analysts are expressing concerns about the outlook for luxury consumption in the U.S., Europe, and China. Peter Garnry, head of equity strategy at Saxo Bank, cited uncertainties surrounding the European and Chinese economies as significant contributors to the recent downturn in European luxury stocks.
The upcoming release of quarterly sales reports by major European luxury groups, commencing with LVMH on Oct. 10, may provide further insight into the sector’s performance.
Although luxury valuations have dipped, they continue to surpass the broader market significantly. LVMH’s 12-month forward price-to-earnings ratio stands at approximately 21, while Richemont’s is 15.6, in contrast to the STOXX 600’s approximately 12, according to LSEG data.
Notably, Danish drugmaker Novo Nordisk overtook LVMH as Europe’s most valuable listed company last month, signaling a shift in investor sentiment away from luxury stocks.
Some analysts have adopted a more cautious stance on the luxury sector. UBS recently revised its estimates to factor in the risk of a slowdown in Chinese consumption. Morgan Stanley and Bank of America have also trimmed their earnings forecasts, citing reduced spending in the U.S. and Europe following the pandemic.
While consensus has become more cautious, several market players and analysts remain optimistic about the long-term outlook. Analysts at Bernstein suggest that companies like LVMH, which are investing in marketing and moderating price increases, are well-positioned in an uncertain economic environment.
Gilles Guibout, head of European equity strategies at AXA Investment Managers, expressed cautious interest, stating that luxury stocks have moved closer to long-term averages, making them more attractive. However, he maintained his underweight rating due to ongoing uncertainties and plans to assess quarterly results for confirmation of a slowdown.
The luxury sector, known for its resilience, now navigates a landscape of shifting investor sentiment and economic challenges, with market players keeping a keen eye on the road ahead.
