Recently, European luxury stocks have experienced a significant rebound, thanks to China's announcement of increased economic stimulus measures, which have greatly boosted the luxury market. In the past five days, shares of major luxury giants including Hermes International, Richemont, and LVMH surged over 15%, marking the best weekly performance since 2012.
The luxury industry has been under pressure for most of this year. However, with China's commitment to more stimulus measures, investors are beginning to reassess the sector's potential. Analyst Piral Dadhania from RBC Capital Markets believes the market may be nearing a bottom, which is often a good buying opportunity. The introduction of China's stimulus plan had a very positive impact on stock prices.
Despite recent pessimism among analysts and near multi-year lows for stocks of companies like Kering, Burberry, and Hugo Boss AG, earnings warnings and stock declines have made valuations more attractive. Investors are starting to take an interest in these stocks, with portfolio managers like Nick Clay from Redwheel establishing new positions in companies like LVMH.
Furthermore, the MSCI Europe Textiles, Apparel & Luxury Goods Index remains above the MSCI Europe Index but is far below its 2021 peak. Some strategists believe China's measures may not sustain long-term gains, but others warn of significant risks in missing investment opportunities. Barclays strategists have noted that investors who avoid such stocks may face "painful trades."
According to a report by Bain & Company, Europe's luxury business heavily relies on Chinese consumers, who are expected to account for 22% to 24% of global luxury sales in 2023. Previously, the Chinese luxury market's size doubled from 2017 to 2021, driven by the rapid growth of the Chinese middle class.
Although American consumers have started reducing luxury spending in 2023, China's consumer potential remains vast. LVMH's (ticker: LVMH) sales in the Asian market, excluding Japan (accounting for 30% of its overall sales), fell by 14% in the first half of 2024, while sales in Japan surged by 57%, thanks to a spike in sales to Chinese tourists.
Overall, this rebound in European luxury stocks has brought optimism to the market, and investors are starting to focus on the sector's potential opportunities. While uncertainties remain, the current situation may offer an attractive entry point for investors.
