The problems facing Europe’s hottest industry are mounting.
Warning from Cartier owner chairman Richemont Group Luxury goods stocks tumbled last week as stubborn inflation began to affect demand in Europe. The downbeat news adds to a series of worrying economic signals from China and signs of weakening trends in the United States.
It’s all testing investor confidence in the expensive industry and raising questions about the theory that luxury goods stocks are Europe’s strongest reaction to Wall Street’s soaring technology stocks. About $180 billion has been lost since the recent peak in July, putting earnings this year in jeopardy. LVMH alone was responsible for about 60% of the plunge, with the Louis Vuitton luggage maker overtaken by drugmaker Novo Nordisk A/S as Europe’s largest company in the process.
China’s slow recovery has hit the industry hardest. China accounts for a fifth of European luxury retailer sales. But the discomfort has spread to high-end shopping areas in Paris, Madrid and London. “In Europe, persistent inflation is starting to impact local demand,” Rupert told Richemont shareholders at its annual meeting in Geneva on Wednesday.
“What we are seeing in the luxury sector is the end of the consensus ‘long’,” said Gilles Guibout, portfolio manager at Axa Investment Managers in Paris, referring to this year. Investors flocked to the industry in the first half of the year. “Europe is typically very sensitive to world economic growth, and this is hurting luxury goods as there is evidence of a slowdown.”
Gibbett is underweight in luxury goods and does not plan to buy these stocks until further pullbacks make them more attractive.
Latest China Services Sector Survey Reveals More negative data For luxury brands, August saw the slowest expansion this year. This shows that consumers in the country are not optimistic about their future income due to the economic downturn and tend to save rather than spend.
The surge in bond yields has proven a blow to some companies that, like technology companies, rely heavily on capital to expand and benefit from low interest rates. Benchmark U.S. Treasury yields hit their highest levels since 2007 in August, further dampening stock market sentiment.
LVMH Chief Executive Bernard Arnault’s status as the world’s richest man has become a high-profile casualty as MSCI Inc.’s index of luxury goods stocks has plunged 15% since mid-July. As of September 7, Arnault’s wealth has dropped from a record high of $212.4 billion to $170.4 billion. Despite this, the French businessman continued his history of wealth. buy stocks LVMH has acquired about 215 million euros ($230 million) worth of shares since the end of July, according to regulatory filings.
For other investors, the sector’s high valuations make any disappointment intolerable. The MSCI European Textile Apparel and Luxury Goods Index trades at a price-to-earnings ratio of 24 times, which is higher than the historical average and represents a premium of more than 90% to the benchmark index.
Bruno Vacossin, senior portfolio manager at Palatine Asset Management in Paris, said now is a good time to reduce holdings and lock in gains. “I don’t think the driver of luxury stocks has been broken, just that the growth trend has weakened,” he said.
In addition to concerns about economic malfunction in Europe (with activity weakening and price pressures persisting) and the seemingly endless supply of bad news from China, the latest U.S. earnings season provides evidence: weaken consumer model. Faced with this situation, analysts’ forecasts for luxury goods companies still appear to some investors to be too optimistic.
“Many brokers have revised their price targets and I think the consensus is a little too high,” Vacossin said, adding that he had reduced his positions in LVMH and Hermes.These two companies are like Moncler and Swatch Groupis expected to achieve double-digit growth in the current reporting year.
Analysts at HSBC Holdings Plc broke ranks this week, warning that third-quarter results for the luxury goods industry could be “weak.” Luxury spending in Europe has recovered to only 41% of August 2019 levels, as restrictions on flight capacity and visas limit visitor numbers and exacerbate local headwinds, they said.
What’s more, technical analysts point to signs that the slide for LVMH and its luxury goods peers could get worse.
“The sector’s underperformance is likely to continue in the coming months,” said Valerie Gastaldy, a technical analyst at DayByDay. “Hermes will be the key to mobile speed. Its The performance has been very good and may buy the rest of the industry some time. However, overall if we look towards the end of the year, both absolute and relative performance, downside risks remain.”
Analysts’ stock price forecasts still don’t reflect this concern. Their combined price targets imply gains of 25% for LVMH next year, 28% for Gucci owner Kering and 9.5% for Birkin bag maker Hermès. According to their estimates, MSCI’s sector index offers potential returns of more than 12%.
“These stocks have done well this year, so taking profits makes sense,” said Paladin Asset Management’s Vacossin. “But I think this is more of a tactical move than a broad change in trends.”
— With assistance from Angelina Lascott
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