Luxury’s rebound is proving elusive as China gloom adds to warnings

LUXURY stock investors are bracing for more bad news after the likes of Burberry Group and Hugo Boss fell short of already reined-in expectations and economic data from China dents the chances of a near-term rebound.

Even though valuations have fallen more than 20 per cent since last year’s peak, warnings from the UK and German companies have sent investors rushing to sell. That indicates that the forward price-to-earnings ratio for the group has not priced in the full extent of the industry’s woes.

“Sentiment remains jittery around where future downgrades will come from,” said Swetha Ramachandran, a fund manager at Artemis Investment Management.

Richemont will offer fresh insight on how luxury companies are coping with a sector-wide growth slump when it reports third-quarter sales on Thursday (Jan 18). The Cartier-owner suffered a rating cut by Investec this week, following at least six downgrades for industry leader LVMH in the second half of last year.

Concerns about demand for luxury goods were amplified on Wednesday with lacklustre economic growth figures from China, whose shoppers account for about a quarter of the estimated 362 billion euros (S$530 billion) global market, prompting an across-the-board drop in the European sector.

Most brokers have scaled down their earnings expectations by over 5 per cent since September, with the sector’s fortunes remaining unclear and hinging on a still-fragile global economic recovery.

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Investors expect this year’s start to compare particularly unfavourably with 2023’s initial optimism, when China’s reopening fuelled a splurge in high-end watches and pricey coats, briefly pushing LVMH’s valuation above US$500 billion.

“We see few catalysts for the luxury sector before April/May 2024,” said Aurelie Husson-Dumoutier, an analyst at HSBC. What’s more, price increases are becoming more of an issue for aspirational consumers, with luxury demand weakening over the holiday season, the analyst said.

Even so, a sector that is going through a difficult period still has room for winners.

Hermes, especially, has shown less of the weakness of peers as demand remains high for its coveted handbags that can sell for anywhere from over 8,000 euros into tens of thousands of euros.

“There will probably be big differences between stocks,” said Bruno Vacossin, a senior portfolio manager at Palatine Asset Management. “I expect a big performance gap between top players such as Hermes and LVMH and the industry’s laggards.”

LVMH reports annual results on Jan 25 and Hermes on Feb 9.

Many are keeping their long-term bets on a sector that is known for its ability to generate superior growth due to pricing power that typically beats inflation and protects profit margins. A large majority of analysts tracked by Bloomberg still recommend buying LVMH and Richemont, while the rest are neutral.

Rebound coming

A rebound in earnings is likely six months away as economic growth accelerates and travelling from China picks up, said Artemis Investment Management’s Ramachandran.

The sector is currently on low valuation multiples and waiting for good macroeconomic news such as lower interest rates and rising real wages for entry-level fashion and aspirational brands, said Deborah Aitken, an analyst at Bloomberg Intelligence.

Until then, more risks remain, especially for players at the bottom end of the pyramid, according to Ariane Hayate, a fund manager at Edmond de Rothschild Asset Management.

“For sure, we don’t expect to get a lot of bullish messages,” she said. BLOOMBERG