The narrative on European luxury-goods stocks has flipped in the space of a week.
Under pressure for most of the year due to a slowdown in Chinese demand, the sector has rebounded strongly over the past five days with a Goldman Sachs basket of luxury companies set to notch its best week since 2012.
Stocks including Birkin bag-maker Hermes International, Cartier-parent Richemont and France’s LVMH have all surged more than 15%, propelled by China’s pledge to step up stimulus. LVMH’s investment in designer outerwear label Moncler only added to the feel-good factor.
“We did feel we were quite close to the bottom and that’s normally the time to buy,” said Piral Dadhania, an analyst at RBC Capital Markets. “What surprised us and caught us offside a little bit is the fact that the China stimulus came and it had a very, very positive impact on share prices.”
Given Chinese shoppers play an instrumental role in the fortunes of firms making items like pricey handbags, high-end cognacs and the glitziest timepieces, this is exactly what investors had been hoping for to stem the turmoil.
The outsize gains are perhaps not entirely surprising given the growing chorus of bearishness from analysts recently, and with stocks like Gucci-owner Kering, Britain’s Burberry Group and German apparel maker Hugo Boss trading near multi-year lows. All three issued profit warnings during the second-quarter earnings season and their shares are down more than a third this year.
See also: Bulgari CEO sees China luxury market recovering in next two years
The declines have taken much of the hot air out of valuations. While the MSCI Europe Textiles Apparel & Luxury Goods Index still trades at a sizeable premium to the MSCI Europe gauge, it’s far off the roaring levels of 2021.
Cheaper valuations have started attracting investor interest. Redwheel portfolio manager Nick Clay said he took advantage of the recent sector weakness to start a new position in LVMH, which he sees as a durable company whose shares have been weighed down by concerns over China and the US.
See also: LVMH's empty Chinese megastore signals deeper luxury crash
“Eventually, sentiment and confidence will turn more positive. Whether this is the bottom is impossible to call, but if it is not, then it seems likely that further measures from the authorities will be forthcoming,” Clay said, referring to Chinese stimulus measures.
While some strategists see China’s measures as insufficient to sustain a rally in stocks most exposed to its economy, others have cautioned about the risk of missing out. Barclays strategists warned that investors who have snubbed such stocks could face a “pain trade”.
Charts: Bloomberg
