Europe’s luxury brands are seeing a potential decline in their stocks as investors express concerns over the impact of a Chinese economic slowdown and uncertainty surrounding interest rates. The STOXX Europe Luxury 10 index, which had a strong start to 2023, has experienced its largest quarterly decrease since 2020. The value of the top 10 luxury stocks has dropped by $175 billion since the end of March, with China’s recovery being uncertain, and growth slowing down. Additionally, high inflation and rising interest rates have caused consumers in the United States to reduce their spending. These factors have contributed to the recent decline in luxury stocks as investors anticipate potential earnings cuts.
Bernard Ahkong, co-CIO at UBS O’Connor Global Multi-Strategy Alpha, identifies rising interest rates, investor positioning, and expectations of earnings reductions as key factors behind the recent decrease in luxury stock valuations. Although the luxury “Big 10” index is still up by 20% year-on-year, it experienced its worst quarterly performance in relation to the STOXX 600, which fell by 2.5% in the same period. Peter Garnry, head of equity strategy at Saxo Bank, echoes concerns about the outlook for luxury consumption in Europe, the US, and China, and believes this uncertainty has led to the decline in European luxury stocks.
The upcoming quarterly sales results from major European luxury groups, starting with LVMH on October 10, will provide further insight into the state of the luxury sector. Despite the decline in valuations, luxury brands still have higher price-to-earnings ratios compared to the broader market. LVMH’s 12-month forward price-to-earnings ratio is around 21, while Richemont’s is 15.6, compared to approximately 12 for the STOXX 600. However, the recent dethroning of LVMH as Europe’s most valuable listed company by Danish drugmaker Novo Nordisk indicates waning investor interest in luxury stocks.
Analysts have become more cautious about the luxury sector, with UBS reducing its estimates to account for the risk of slowing Chinese consumption. Morgan Stanley has also reduced its 2024 earnings-per-share estimate for luxury goods by 6%, while Bank of America has slashed its forecast by 7%. Both banks attribute the decrease in spending to consumers in the United States and Europe scaling back their expenses following the pandemic. Credit card data from the United States shows a year-on-year decline of 16% in luxury fashion spending in July and August.
Despite the growing caution, some market players and analysts maintain a positive outlook for the long-term prospects of luxury stocks. Analysts at Bernstein believe the sector correction has been excessive and highlight companies like LVMH, which are investing in marketing and reducing price increases, as better positioned in an uncertain economic environment. Gilles Guibout, head of European equity strategies at AXA Investment Managers, was initially cautious due to high valuations but now sees potential in the sector as valuations approach long-term averages. However, he maintains an underweight rating for luxury stocks until the quarterly results confirm the extent of the slowdown.
In conclusion, Europe’s luxury brands are facing challenges as investors worry about the impact of a Chinese economic slowdown and interest rate uncertainty. The decline in luxury stocks reflects concerns about the European and Chinese economies, as well as decreased spending by consumers in the United States and Europe. The upcoming quarterly sales results from major luxury groups will provide more clarity on the situation. While analysts have become more cautious, some remain optimistic about the long-term prospects of luxury stocks, highlighting companies that are adapting their strategies to the current economic environment. Overall, the sector is undergoing a correction, and the future will depend on how luxury brands navigate these challenges.
Useful Links:
1. Reuters: Luxury Brands Brace for Slowdown, Investors Eye China, US Spending
2. Financial Times: European Luxury Shares Slip amid fear of China Economic Slowdown
