Luxury Goods Stocks Experience Setback as US Demand Softens

 

Introduction:

The luxury goods sector, which has been experiencing a remarkable rally driven by international demand, particularly from China, faced a significant setback on Tuesday as over $30 billion was wiped out from the sector. Shares of prominent luxury brands such as Hermes International, LVMH Moet Hennessy Louis Vuitton SE, and Kering SA saw declines ranging from 2% to 5.5%. While the sector has performed strongly in the past year, mirroring the dominance of Big Tech in the US stock market, concerns have emerged regarding a relatively subdued performance in the US market and weakness among aspirational consumers. This article delves into the reasons behind the setback and analyzes the impact on the luxury goods industry.

Subdued US Performance:

Attendees at a luxury conference in Paris, organized by Morgan Stanley, highlighted a "relatively more subdued" performance in the US market. Edouard Aubin, an analyst at the investment bank, reported a weakening in aspirational consumer sentiment. This dampened performance contrasts with more buoyant demand observed in other markets, suggesting a soft landing in the US offset by strength in regions such as Asia.

Significance of Asia and the US:

Both Asia and the US are vital markets for European luxury companies. LVMH's annual report reveals that Asia (excluding Japan) accounted for 30% of their sales in 2022, while the US contributed 27%. This underscores the importance of monitoring the performance of these regions for the luxury goods industry as a whole.

Growing Concerns about US Slowdown:

Deutsche Bank analysts have expressed growing concerns about a slowdown in the US market. While Chinese demand has been a key driver of strong sales, investors are expected to exercise selectivity going forward. The luxury sector has outperformed the broader market significantly this year, with LVMH and Hermes registering gains of 25% and 34%, respectively, compared to a 10% rise in the Stoxx Europe 600 Index. However, the premium of the luxury sector over the market is currently at historically high levels, suggesting a need for caution.

Resilience amidst Economic Slowdown:

Luxury stocks have defied the broader economic slowdown, largely due to the belief that Chinese consumers, following strict lockdown measures, will exhibit strong spending tendencies. LVMH's record-breaking shares and the surge in Hermes' quarterly sales provide evidence of this trend. Nonetheless, early warning signs, including a slowdown in US growth reported by LVMH and softening demand for entry-level products among younger Americans noted by Burberry Group Plc, indicate potential challenges on the horizon.

Conclusion:

The luxury goods sector, buoyed by international demand, has experienced a setback as US performance weakens and concerns about a broader economic slowdown emerge. While luxury stocks have outperformed the market, investors are urged to exercise caution due to the sector's historically high premium. As the industry navigates these challenges, the continued strength of Asian markets, particularly China, remains crucial for sustaining growth.