The narrative for European luxury goods stocks reversed within a week.
After being under pressure for much of this year due to slowing Chinese demand, the sector has rebounded strongly over the past five days, with Goldman Sachs’ luxury company basket on track for its best week since 2012.
Shares in Birkin bag maker Hermès International SCA, Cartier’s parent company Richemont and France’s LVMH rose more than 15% after China pledged to step up its economic stimulus package. LVMH’s investment in designer outerwear brand Moncler SpA has only increased the comfort factor.
“It felt like we were getting pretty close to the bottom, which would normally be a time to buy,” said Pilar Dadania, an analyst at RBC Capital Markets. “What surprised us and caught us a little bit offside was the fact that the Chinese stimulus was introduced and it had a very, very positive impact on stock prices.”
Given that Chinese shoppers play a key role in the fortunes of companies that make goods such as expensive handbags, luxury cognac and the flashiest watches, this is exactly what investors are looking for to stave off disruption. It’s what I expected.
Analysts have recently become more bearish, and stocks such as Kering, which owns Gucci, Britain’s Burberry Group, and German apparel maker Hugo Boss, are hovering near multi-year lows. Given that, this large increase may not be entirely surprising. All three companies issued profit warnings during the second-quarter earnings season, and their stocks have fallen by more than a third this year.
The decline has taken much of the heat out of valuations. The MSCI Europe Textiles, Apparel and Luxury Index still trades at a significant premium compared to the MSCI Europe index, but it is far from the roaring levels of 2021.
The cheap valuation is starting to attract investor interest. RedWheel portfolio manager Nick Clay said he has taken advantage of the recent sector downturn by initiating a new position in LVMH, a durable company whose share price has been weighed down by concerns over China and the United States. .
“Ultimately, sentiment and confidence will become more positive. We cannot say whether this is the bottom, but if it is not, further action by authorities is likely,” Clay said. He said this while referring to China’s economic stimulus package.
Some strategists see China’s measures as insufficient to sustain gains in stocks most affected by the Chinese economy, while others warn of the risk of missed opportunities. Barclays strategists warned that investors who ignore these stocks could face “painful trades”.
Written by Kit Reese
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Editorial | Why luxury goods stocks are heading to the stock bin
Bloomberg’s Andrea Felsted writes that LVMH and Hermès shares are still waiting for consumer recovery in China.