After a challenging year marked by a slowdown in Chinese demand, the luxury goods sector has seen a significant rebound in recent days. A Goldman Sachs index tracking luxury companies is on course to record its best week since 2012, as stocks surged following China’s commitment to enhance economic stimulus.
Key players in the luxury market, including Birkin bag-maker Hermès, Cartier-owner Richemont, and French conglomerate LVMH, have all risen by more than 15% this week. China’s latest economic support measures, coupled with LVMH’s recent investment in Italian outerwear brand Moncler, have fuelled the sector’s recovery.
Analysts had been closely watching for signs of a turnaround. Piral Dadhania, an analyst at RBC Capital Markets, noted that the sector appeared to be nearing a low point, typically seen as a buying opportunity. “We thought we were approaching the bottom, which is often when you want to invest,” he explained. “What took us by surprise was just how strongly share prices reacted to China’s stimulus.”
The recovery comes as a relief to investors, as Chinese consumers are key to the fortunes of luxury brands, from high-end handbags and designer clothing to premium spirits and watches. The sector had been in turmoil, and investors were eagerly awaiting signs of a reversal.
The recent gains follow a period of widespread bearish sentiment. Luxury stocks such as Gucci-owner Kering, the UK’s Burberry, and German fashion house Hugo Boss had been trading near multi-year lows. All three companies issued profit warnings during the second-quarter earnings season, with their shares down more than a third this year. As a result, valuations have become more attractive to investors, despite the sector still trading at a premium compared to broader European stocks.
Redwheel portfolio manager Nick Clay revealed that he had capitalised on the recent weakness to establish a new position in LVMH. Clay believes the luxury giant remains a robust company, despite concerns about its exposure to the Chinese and US markets. “Investor sentiment will eventually turn more positive,” he commented. “Whether we’ve reached the bottom is hard to say, but if not, further support from authorities seems likely.”
While some analysts caution that China’s stimulus may not be enough to sustain a prolonged rally in luxury stocks, others warn that investors who avoid the sector could miss out on potential gains. Barclays strategists have issued a note of caution, suggesting that those who overlook such stocks may be at risk of a “pain trade” as the market improves.
With valuations now more attractive and China’s stimulus boosting optimism, investors are keeping a close eye on the luxury sector’s next moves.
