European luxury goods makers came under pressure for a second day, extending a rout that’s wiped out about $60 billion in market value, in early signs of a turn in sentiment for a sector that’s been “priced for perfection.”
(Bloomberg) — European luxury goods makers came under pressure for a second day, extending a rout that’s wiped out about $60 billion in market value, in early signs of a turn in sentiment for a sector that’s been “priced for perfection.”
LVMH, Kering SA and Richemont have all hit record highs this year, outperforming the broader market, as China’s reopening from Covid Zero fueled sales in the first quarter of the year. Risks related to debt-ceiling talks in Washington, as well as worries that a resurgence of Covid in China could lead to fresh restrictions are now curbing investors’ appetite for the sector.
Expensive valuations aren’t helping either: The MSCI Europe Apparel & Luxury Index is trading at nearly twice the price of the European benchmark, on a price-to-earnings basis, and well above its own 10-year average.
“The luxury goods sector is not totally immune to economic deceleration, with slowing trends in the US and Korea apparent in the latest releases,” said Roland Kaloyan, a strategist at Societe Generale. Kaloyan had downgraded the sector to neutral earlier this year in a note titled “Too fast, too furious.”
Hermes has rallied about 30% this year while Richemont, the Swiss jewelry maker that owns the Cartier brand, and LVMH are both up more than 20%.
Share gains have left stocks in the sector “priced-for-perfection,” according to strategists at Bloomberg Intelligence. LVMH — the first European company to reach a market capitalization of $500 billion — trades at 24 times estimated earnings, almost twice that of France’s benchmark index.
The luxury sector “is caught in the middle of a selloff in quality growth stocks,” said Swetha Ramachandran, lead manager of the GAM Luxury Brands Fund. “Luxury specifically may be affected by the perception that there are few near-term catalysts after a strong run of performance.”
US Slowdown
Sanford C. Bernstein analyst Luca Solca agreed, saying there is likely some profit-taking happening in the sector, with US macro-economic uncertainties and the resurgence of Covid in China among reasons for declines this week. “It is the stocks that have risen the most getting a downward correction: Hermes, LVMH, Moncler,” he said.
While luxury companies had a good earnings season overall, propelling shares even higher over the past month, cracks in the US market have been starting to show. LVMH noted that it is seeing a slowdown in US growth, while Burberry said that it is seeing demand for sneakers and entry-level products softening among younger Americans.
Still, some analysts don’t see positive fundamentals for luxury companies changing.
The recent weakness for stocks is “not fundamentally driven,” Morgan Stanley analysts led by Edouard Aubin wrote in a note dated May 23. The US bank held a luxury conference in Paris this week where industry executives pointed to a “continued moderation in trends in the US, compensated though by robust trends elsewhere.”
A separate luxury conference was also held by HSBC in the French capital this week. Analyst Erwan Rambourg told Bloomberg that “the general mood this week was positive.” Both conferences were closed to the media.
Previous periods of economic uncertainty — such as 2014, 2018 and 2022 — have typically only briefly interrupted long-term outperformance for the luxury sector.
–With assistance from Julien Ponthus, Michael Msika, Chiara Remondini and Jan-Patrick Barnert.
(Updates with context, more comments.)
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