Reuters reports from London.Europe’s glitzy luxury companies, which did the best on the stock market in 2023, could see more gains if Chinese spending goes up, but some people are starting to think the sector is too expensive.
Companies like the French luxury giant LVMH, which owns Louis Vuitton, and the Swiss jewellery company Richemont have benefited from their wealthy customers’ ability to handle the rising cost of living.
Since the beginning of 2023, the decision by China to allow more normal activity and get rid of its strict COVID-19 rules has given the sector another boost.
So far this year, an index of European stores that sell high-end goods has gone up about 18%, which is more than the STOXX 600, which has gone up 6.2% in the same time frame.
But the fact that luxury goods companies aren’t as cheap as they used to be is “a concern,” according to Kasper Elmgreen, Head of Equities at Amundi, Europe’s largest asset manager.
“They are valued much more fairly now, and there is less that might still be unknown about them. “When something gets close to being priced perfectly, there is always a higher chance of being disappointed.”
Refinitiv data shows that the price-to-earnings ratio for the MSCI Europe luxury index is around 26, while it is closer to 13 for the STOXX.
Earlier than the index https://www.reuters.com/graphics/EUROPE-STOCKS/LUXURYGOODS/zjvqjezxwpx/chart.png
European luxury has always been more expensive than the rest of the market, but this gap has gotten even bigger in recent years. Refintiv Datastream says that at 23 times forward earnings for the next 12 months, its current premium of 82% is almost twice as high as the 20-year average.
Luxury premium https://fingfx.thomsonreuters.com/gfx/mkt/dwpkdaxzmvm/Luxury%20premium.JPG
The Cornerstone of Europe
By market capitalization, LVMH is Europe’s most valuable company. It has a PE ratio of around 30, while rival Hermes has a valuation of almost 60. The world’s most valuable company, Apple (NASDAQ:AAPL), has a PE ratio of about 23.
Jelena Sokolova, a senior equity analyst at Morningstar, said that China’s reopening is the most important thing for European luxury stocks this year, and that at least 50% of the price has already been taken into account.
“We don’t think this sector is undervalued anymore… “There were some opportunities last year, but they are fairly valued now, or a little overvalued right now,” she said.
LVMH vs Apple https://fingfx.thomsonreuters.com/gfx/mkt/zdvxdrmqovx/LVMH%20vs%20Apple.JPG
In a January research note, UBS analysts said that 2023 would be “the year of the Chinese consumer for European luxury.” They named Richemont, Hermes, and the Italian luxury group Moncler as their top picks and “the most balanced, high-quality plays on China re-opening.” “.
There are still worries about a recession, earnings expectations are expected to fall, and inflation is through the roof. This means that the potential returns on luxury stocks could be a boon in what looks to be a tough year for stock-pickers.
The ability of Europe’s luxury brands to raise prices without losing customers has been a key strength. Even though inflation on the continent slowed down in December, investors are still interested in this ability.
Nick Clay, head of global equity income at investment manager Redwheel, said, “The things they sell don’t really depend on how much they charge for them. The average price of a product at Cartier is $10,000, and whether it goes up to $11,000 is neither here nor there.”
As Chinese shoppers start shopping again and luxury companies show how much they can charge, these shares have more room to go up. But since prices are already pretty high, investors wonder how much higher prices can go.
In LVMH’s most recent earnings report, the company said that its organic sales went up by 9% in the fourth quarter. This was because shoppers in Europe and the United States splurged during the holiday season, which helped to make up for some of the problems caused by COVID-19 in China.
But some analysts looked at the margins, which took some of the shine off the sales increase in the fourth quarter. Still, it didn’t have much of an effect on the share price, which has gone up 600% in the last 10 years, while the benchmark STOXX has gone up 91%.
Mark Denham, head of European equities at French asset manager Carmignac, said, “Companies like LVMH have high-quality businesses, they make more money over time, and they give shareholders a lot of money back.”
“It’s true that these companies’ ratings have gone up, making it a little bit more uneven, but in the long run, earnings compounding is the most important thing.
LONDON (Reuters) – Europe’s glitzy luxury companies, which did the best on the stock market in 2023, could see more gains if Chinese spending goes up, but some people are starting to think the sector is too expensive.
Companies like the French luxury giant LVMH, which owns Louis Vuitton, and the Swiss jewellery company Richemont have benefited from their wealthy customers’ ability to handle the rising cost of living.
Since the beginning of 2023, the decision by China to allow more normal activity and get rid of its strict COVID-19 rules has given the sector another boost.
So far this year, an index of European stores that sell high-end goods has gone up about 18%, which is more than the STOXX 600, which has gone up 6.2% in the same time frame.
But the fact that luxury goods companies aren’t as cheap as they used to be is a “concern,” according to Kasper Elmgreen, Head of Equities at Amundi, Europe’s largest asset manager.
“They are valued much more fairly now, and there is less that might still be unknown about them. When something gets close to being priced perfectly, there is always a higher chance of being disappointed.”
Refinitiv data shows that the price-to-earnings ratio for the MSCI Europe luxury index is around 26, while it is closer to 13 for the STOXX.
Earlier than the index https://www.reuters.com/graphics/EUROPE-STOCKS/LUXURYGOODS/zjvqjezxwpx/chart.png
European luxury has always been more expensive than the rest of the market, but this gap has gotten even bigger in recent years. Refintiv Datastream says that at 23 times forward earnings for the next 12 months, its current premium of 82% is almost twice as high as the 20-year average.
Luxury premium https://fingfx.thomsonreuters.com/gfx/mkt/dwpkdaxzmvm/Luxury%20premium.JPG
THE CORNERSTONE OF EUROPE
By market capitalization, LVMH is Europe’s most valuable company. It has a PE ratio of around 30, while rival Hermes has a valuation of almost 60. The world’s most valuable company, Apple (NASDAQ:AAPL), has a PE ratio of about 23.
Jelena Sokolova, a senior equity analyst at Morningstar, said that China reopening is the most important thing for European luxury stocks this year, and that at least 50% of the price has already been taken into account.
“We don’t think this sector is undervalued anymore… There were some opportunities last year, but they are fairly valued now, or a little too overvalued right now,” she said.
LVMH vs Apple https://fingfx.thomsonreuters.com/gfx/mkt/zdvxdrmqovx/LVMH%20vs%20Apple.JPG
In a report from January, UBS analysts said that 2023 was “”the year of the Chinese consumer for European luxury,” and they named Richemont, Hermes, and the Italian luxury group Moncler as their top picks and “the most balanced, high-quality plays on China re-opening.”
There are still worries about a recession, earnings expectations are expected to fall, and inflation is through the roof. This means that the potential returns on luxury stocks could be a boon in what looks to be a tough year for stock-pickers.
The ability of Europe’s luxury brands to raise prices without losing customers has been a key strength. Even though inflation on the continent slowed down in December, investors are still interested in this ability.
Nick Clay, head of global equity income at investment manager Redwheel, said, “The things they sell don’t really depend on how much they charge for them. The average price of a product at Cartier is $10,000, and whether it goes up to $11,000 is neither here nor there.”
As Chinese shoppers start shopping again and luxury companies show how much they can charge, these shares have more room to go up. But since prices are already pretty high, investors wonder how much higher prices can go.
In LVMH’s most recent earnings report, the company said that its organic sales went up by 9% in the fourth quarter. This was because shoppers in Europe and the United States splurged during the holiday season, which helped to make up for some of the problems caused by COVID-19 in China.
But some analysts looked at the margins, which took some of the shine off the sales increase in the fourth quarter. Still, it didn’t have much of an effect on the share price, which has gone up 600% in the last 10 years, while the benchmark STOXX has gone up 91%.
Mark Denham, head of European equities at French asset manager Carmignac, said, “Companies like LVMH have high-quality businesses, they make more money over time, and they give shareholders a lot of money back.”
“It’s true that these companies’ ratings have gone up, making it a little bit more uneven, but in the long run, earnings compounding is the most important thing.
