Luxury stocks are performing at their best – here’s why
- Luxury stocks such as Hermès, Richemont and LVMH recorded price gains of more than 20 percent in a week.
- A new stimulus package from China's central bank to boost the economy sparked the rally.
- Despite a short-term recovery, Bank of America warns of long-term challenges for the luxury sector.
Luxury stocks have had a brilliant week. And: The rally doesn't seem to be over yet. After months of difficulties due to weak demand from China, European luxury brands posted their best performance in more than a decade.
Companies such as Hermès, Richemont and LVMH recorded price gains of more than 20 percent in just five days (As of September 30th, 10 a.m.). But what actually triggered the short-term rally in the luxury segment?
China's role in the luxury industry's comeback
The reason for the upswing was a new economic stimulus package from the Chinese central bank, which aims to stimulate the country's stagnating economy.
Luxury brands have long relied on Chinese consumers to fuel their growth. Chinese consumers are doing so, according to a study by the Financial Times about a third of global luxury sales.
But a drop in demand earlier in the year hit the sector hard, with many stocks tumbling due to weakening demand.
Luxury drives the French stock market to its best weekly gain since March 2023
The tide now turned when the People's Bank of China intervened with an ambitious economic stimulus package. The central bank cut interest rates and unveiled other measures to support businesses and boost consumption.
“We were close to rock bottom, but the speed and scale of Chinese intervention surprised us,” Piral Dadhania said. He is an analyst at RBC Capital Markets and spoke to “Bloomberg“. “The stimulus package had an immediate and very positive impact on luxury goods stock prices.”
The rise in luxury stocks also helped the broader market lift. The CAC 40, the leading French stock index, achieved its best weekly performance since March 2023 with an increase of almost four percent.
Last Friday alone, the index rose by 0.64 percent, as Jim Reid, market strategist at Deutsche Bank, explains. This development was mainly due to the luxury goods companies in the index.
But despite this positive momentum, some analysts are sounding the alarm that challenges could lie ahead for the sector.
Dark clouds for global brands?
While China's stimulus package provided a short-term recovery, the long-term outlook for global consumer brands in China is less optimistic.
Chen Lao, an analyst at Bank of America (BofA), identifies the luxury sector as one of six sub-sectors where global brands are losing ground due to slowing demand and intense competition. According to the bank, Chinese consumers' luxury spending rose just 4 percent in the second quarter of 2024, compared to 10 percent in the first quarter.
Luxury revenue in mainland China could shrink by 15 percent annually over the next two years as Chinese consumers increasingly shop abroad, particularly in Japan.
BofA analyst Ashley Wallace estimates that 35 percent of Chinese luxury spending in the first half of 2024 occurred overseas. This share could increase to 50 percent by 2025.
Consumption is shrinking in several countries
The weak consumption does not only affect China. Consumption also fell in the USA and the EU in the second quarter. That led to the slowest sales growth in the luxury market in nearly four years, according to Bank of America.
Wallace expects margins to decline by more than 300 basis points by 2025. She recently cut profit expectations for luxury companies by an average of 17 percent.
It also downgraded four major luxury stocks. LVMH, Kering and Zegna from “Buy” to “Neutral” and Hugo Boss from “Neutral” to “Underperformer”.