Stubborn European inflation and a string of worrying economic signals from China and signs of softer trends in the US are weighing on top luxury brand stocks.
Almost $180 billion has already been wiped out since a recent peak in July, leaving gains for the year hanging nominal. The slump is led by LVMH that accounted for about 60 percent of that slump. It has relegated LVMH behind drugmaker Novo Nordisk A/S as Europe’s larges t company.
China, which accounts for a fifth of European luxury retailers’ sales, has not recovered well and has dealt the biggest blow to the sector. But China is not the only factor, sales are disappointing in the high-end shopping districts of Paris, Madrid and London. “In Europe, ongoing inflation is starting to impact local demand,” Rupert told Richemont shareholders at its annual meeting in Geneva.
Experts say Europe is typically very sensitive to world growth and this is hurting luxury as there is evidence of a slowdown. They expect luxury stocks to go further down. They advise investors to trim their holding in luxury stocks.
The latest survey of China’s services industries revealed more negative data for luxury names, with the slowest expansion this year in August. That suggests the nation’s consumers aren’t optimistic about their future income because of the faltering economy and are tending to save rather than spend.
For investors, the sector’s high valuations leave little tolerance for any disappointments. The MSCI Europe Textiles Apparel & Luxury Goods Index trades at 24 times projected earnings, above its historical averages and a massive 90 percent-plus premium to benchmark indexes.
Along with worries about Europe’s misfiring economy, where activity is fading while price pressures persist, and a seemingly endless stream of bad news out of China, the latest US earnings season has served up evidence of weakening consumer patterns. In the face of this, analyst projections for luxury companies still look overly optimistic to some investors.
