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Europe's luxury stocks set for growth challenges in 2024

Luxury goods are expected to remain robust in the long term
Luxury goods are expected to remain robust in the long term Copyright  LVMH
Copyright  LVMH
By Tina Teng
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Major European luxury stocks have been experiencing a slowdown in growth amid softened global purchasing power, particularly in China.

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Top European luxury stocks have all shown a slowdown in growth in their first-quarter earnings results, although these brands displayed varying growth patterns. The Stoxx Europe Luxury 10 Index (STXLUXP), which consists of 10 companies positively exposed to European luxury goods, such as LVMH, Hermes, and Kering, fell by 2% monthly. Meanwhile, the European Stoxx 600 Index (SXXP) rose by 3% during the same period.

A notable trend was that most companies reported a negative impact from weakened consumer demand in Asia, particularly in China. This sector may experience flat growth due to a sluggish Chinese economic recovery in 2024, while another major luxury consumer market, the United States, also signalled a slowdown in consumer spending, given the decades-high interest rates.

Luxury consumption softens in China

Most top luxury branding companies saw a sharp decline in sales, particularly in Asian countries, during the March quarter. The largest luxury conglomerate, LVMH reported a first-quarter revenue of €20.7 billion, down 2% year over year, primarily due to a 6% revenue drop in Asia, excluding Japan.

While revenue in Japan jumped by 32%, sales were mainly boosted by Chinese tourists. It also noted that sales in the wine and spirit division were hit by weakened consumer spending in the US, dragging the segment down by 16% during the first quarter.

Gucci's owner, Kering, was the worst performer among the Stoxx luxury 10 components, slumping by 18% year-to-date. The company posted an 11% annual decline in sales during the first quarter and warned of a likely 40% to 45% slump in the first half of 2024.

CEO Francois-Henri Pinault said: "While we had anticipated a challenging start to the year, sluggish market conditions, notably in China, and the strategic repositioning of certain of our Houses, starting with Gucci, exacerbated downward pressures on our top line."

The trajectory of LVMH and Kering reflects the tougher global macro challenges that luxury groups are encountering – flattening Chinese consumer demands and softening spending in the US. According to a report from Bain & Company, China's luxury market in 2024 is expected to remain a similar trend as it was in 2023, which may lead to a "mid-single-digit growth" rate. Coincidently, analysts at Barclays also believe that global sales of luxury goods will slow to a mid-single percentage digit this year from 9% in 2023.

A slow return for Chinese overseas travellers

The progress of Chinese tourism recovery will play a critical role in driving luxury consumption. Since the lift of the Covid-19 curbs, Chinese economic recovery has been on a faltering journey, with sharply weakened consumer confidence. The jump in luxury markets in 2023 was mainly due to a low base in 2022. Chinese consumers remain cautious due to the property market turmoil and a slowing down in employment.

Domestic tourism saw a jump in 2023, and internal travelling is expected to exceed in 2024. However, outbound Chinese tourism is likely to remain tepid this year due to dampening household finance and a huge depreciation in the Chinese Yuan. China's consumers are more sensitive to price and more discretionary to high-value goods. The restrictions and complicity in visa application also contributed to the slowdown in Chinese tourism.

Luxury stocks expected to remain robust in the long term

Nonetheless, growth in the luxury sector may be reaching its trough this year, with Chinese outbound tourism gradually returning to pre-pandemic levels. According to a report by the Economist Intelligence Unit, Chinese outbound travellers may accelerate this year and return to pre-pandemic levels by 2025. The early travellers are expected to be from the high-income group and less sensitive to prices.

Globally, central banks are likely to commence rate cuts this year, which could boost consumer and business confidence. The upcoming decision on interest rates by the European Central Bank could act as a bullish catalyst for the European stock markets, as the bank is widely expected to lower the interest rate by 25 basis points on Thursday.

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