LVMH 
Luxury goods got off to a strong start in 2023 thanks to hopes of a rapid recovery in sales in China after three years of health restrictions and a rebound in post-pandemic spending in the USA, but the STOXX Europe Luxury 10 index, which includes the 10 largest European companies in the sector such as LVMH, Kering and Richemont, has just recorded its biggest quarterly decline since 2020.
Some $175 billion has been withdrawn from the index since the end of March, as China's recovery falters and growth slows, while high inflation and rising interest rates force US consumers to cut spending.
"The sector has depreciated sharply over the past two or three months, under the combined effect of rising interest rates, investor positioning and anticipation of earnings cuts," said Bernard Ahkong, co-manager of the UBS O'Connor Global Multi-Strategy Alpha.
Although the STOXX Europe Luxury 10 is still up 20% year-on-year, it recorded its worst third-quarter performance ever against the STOXX 600, which fell by 2.5%.
Among the reasons for this decline, Bernard Ahkong cites growing concerns over the outlook for luxury goods consumption 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 the uncertainty of the European economy and the uneven growth prospects of the Chinese economy," he said.
The gravity of the situation may become clearer in the coming weeks, when several of Europe's biggest luxury groups publish their quarterly sales, starting on Tuesday with LVMH.
THE LUXURY GAP
While luxury valuations have fallen, they remain well above those of the rest of the market: LVMH's 12-month price-to-earnings ratio is around 21 and Richemont's 15.6, compared with around 12 for the STOXX 600, according to LSEG data.
However, in a sign of the sector's waning star, last September Danish drugmaker Novo Nordisk dethroned LVMH from its position as Europe's leading market capitalization, which the French luxury group had held for two and a half years.
The end of LVMH's reign was largely attributed to investors' loss of appetite for luxury stocks, as well as to the success of Novo Nordisk's weight-loss drug Wegovy.
Some analysts were cautious about luxury goods, with UBS last week lowering its estimates to take account of the risk of a slowdown in Chinese consumption.
Morgan Stanley cut its earnings-per-share estimate for luxury goods in 2024 by 6%, and Bank of America by 7%, the latter pointing out that consumers in the US and Europe were spending less than in the post-pandemic period.
Luxury fashion spending was down 16% year-on-year in July and August in the US, credit card data show.
According to UBS analyst Gerry Fowler, the risks associated with luxury stocks began to become more apparent in May.
"But we're not sure that earnings momentum has run out of steam yet," he added.
LONG-TERM OPTIMISM
Although the outlook is more mixed, many market players and analysts remain optimistic for the long term.
"The correction in the sector has been too great," said Bernstein analysts, adding that companies like LVMH that spend on marketing and relax their price increases are best placed in an uncertain economic environment.
Gilles Guibout, Head of European Equity Strategies at AXA Investment Mangers, who was cautious at the beginning of the year due to high valuations, is now interested in the sector.
With valuations now closer to long-term averages, the sector is more attractive, believes Gilles Guibout, even if he has stuck to his "underweight" rating since the start of 2023.
"We'll be waiting for the quarterly results, which should confirm the slowdown," he said.
(Reporting by Lucy Raitano and Mimosa Spencer; French version by Diana Mandiá, edited by Kate Entringer)
