Morgan Stanley cut its 2024 earnings per share estimate for luxury goods by 6%, while Bank of America cut its forecast by 7%.
While European luxury brands shined at Paris Fashion Week, investors are questioning their interest in these companies’ shares due to the economic slowdown in China and interest rate uncertainty.
After an optimistic start to 2023, with the hope of a rapid increase in sales in China after three years of lockdown and with the post-pandemic spending boom in the United States which seems to show no signs of slowing down, the STOXX Europe Luxury 10 Index (.STXLUXP) just recorded its worst quarter since 2020. From March to today, the value of the shares of the top 10 companies in the sector has decreased by as much as 175 billion dollars, due to the mixed recovery in China and slowing growth, while high inflation and rising interest rates of interest are forcing US buyers to tighten their belts.
“Over the last 2-3 months, the sector has undergone a marked devaluation, due to a combination of rising interest rates, investor positioning, and the expectation of earnings cuts,” said Bernard Ahkong, co -CIO at UBS O’Connor Global Multi-Strategy Alpha.
Although the Big 10 luxury index is still up 20% year over year, the third quarter recorded its worst quarterly performance compared to the STOXX 600 Index (.STOXX), which fell by 2.5%.
Ahkong highlighted growing concern about the luxury consumption outlook in the US, Europe, and China, a view shared by Peter Garnry, head of equity strategy at Saxo Bank.
“The recent decline in European luxury stocks reflects uncertainty about the European economy and also the uneven growth prospects of the Chinese economy,” Garnry said.
Although valuations in the luxury sector have fallen, they still remain well above the rest of the market. LVMH’s forecast 12-month P/E ratio is around 21, while Richemont’s is 15.6, compared with around 12 for the STOXX 600 index, according to LSEG data.
However, in a sign of the sector’s declining popularity, Danish drugmaker Novo Nordisk (NOVOb.CO) overtook LVMH (LVMH.PA) as Europe’s most expensive listed company last month.
Some analysts have turned cautious about the luxury sector, with UBS cutting its estimates to take into account the risk of a slowdown in consumption in China. Morgan Stanley cut its 2024 earnings per share estimate for luxury goods by 6%, while Bank of America cut its forecast by 7%, arguing that shoppers in the U.S. and in Europe were spending less than in the post-pandemic period.
Credit card data in the US showed that spending on luxury fashion fell 16% year-over-year in July and August.
Gerry Fowler, head of European equity strategy and global derivatives strategy at UBS, said risks in luxury stocks started to become more apparent in May.
Although the consensus has become more cautious, several market participants and analysts remain optimistic for the long term.
“The industry correction has been excessive,” Bernstein analysts said, adding that companies like LVMH that are investing in marketing and reducing price increases are best suited in an uncertain economic environment.
Gilles Guibout, head of European equity strategies at AXA Investment Managers, was cautious at the start of the year due to extremely high valuations but is now showing interest in the sector.
“Until now, luxury names were considered a refuge. This was also the reason why we were not so inclined to overweight at the beginning of the year,” he said.
With valuations now closer to long-term averages, the sector is more attractive to Guibout, although he maintained the Underweight rating he has held since early 2023.
“We will wait for the quarterly results, which should confirm a slowdown,” he concluded.
Original article published on Money.it Italy 2023-10-20 07:00:00. Original title: Per le aziende del lusso europeo aumentano gli outlook negativi. Ecco perché
