By
Bloomberg
Published
Dec 16, 2023
For LVMH and other luxury-goods stocks, 2024 is shaping up to be 2023 in reverse.
Unlike this year, when China’s reopening fueled a splurge on pricey handbags and jewelry before running out of steam, investors expect 2024 to start on a weak footing before a revival in the second half. As analysts at BNP Paribas put it, next year will likely be “a game of two halves” for luxury stocks such as Richemont and Gucci-owner Kering SA.
Right now, the buoyant start to 2023 that briefly pushed LVMH past a $500 billion market value is a distant memory. Sentiment has been soured by a slew of economic numbers pointing to a fading recovery in China, whose consumers currently account for about a quarter of the estimated €362 billion ($397 billion) global luxury market and potentially 40% by 2030.
A pick-up in demand from Chinese shoppers will be key in validating expectations of a better second half.
“Yes, it’s volatile at the moment, said Flavio Cereda, an investment manager at GAM UK Ltd. “By the time we get to Easter, I would be surprised if we didn’t have signs that this is starting to reverse.”
Luxury’s momentum during the pandemic has burnished its enduring appeal, prompting comparisons to the dominance of technology stocks in the US. A key attraction is the fact that iconic brands enjoy a pricing power that typically beats inflation and protects their profit margins.
Shoppers can’t find enough of the coveted handbags of Hermès International, for instance, with prices that can go for anywhere from about $8,000 to well into the tens of thousands of dollars. Its shares have shown none of the weakness of peers, rising to record levels in the past week.
Yet with the likes of LVMH and Richemont still more than 15% below their 2023 peak, some investors eye an opening to load up on stocks.
“We were reluctant to invest when valuation was at the top earlier this year,” said Raphael Thuin, head of capital markets strategies at Tikehau Capital. “Given the market pullback, we are starting to redeploy in the sector.”
Still, an unflattering first quarter is in the offing after Chinese consumers’ buying reached a peak in the comparable period this year, according to Chris Gao, an analyst at CLSA Ltd.
Those comparisons will ease in the second half of 2024, said Bloomberg Intelligence analyst Deborah Aitken. Sentiment will be aided by growth in tourism and a demand pick-up from Chinese consumers, pushing spending beyond its 2019 revenue base and their global market share to 25%, she said.
On the flip side, shoppers who supported luxury during the super-cycle may not return, instead turning toward experiences, warns Telsey Advisory Group Chief Executive Officer Dana Telsey.
Brokers are also taking a more sober look at the sector due to the prospect of weaker demand and an uncertain economic outlook.
JPMorgan and Morgan Stanley recently downgraded LVMH to a neutral stance while HSBC took a hatchet to all its share price targets for the sector, saying that the industry isn’t recession-proof.
Still, luxury companies are usually much more resilient than other consumer categories because of the strength of their brands, said GAM’s Cereda.
“Short term, I don’t see these momentum investors coming back as there is a lack of catalysts,” said BNP Paribas Asset Management portfolio manager Olivier Rudigoz. “For long term investors however, we think it’s an industry that is very well positioned, notably toward the rising middle class of China and other emerging countries.”
