Luxury stocks in Europe, which had been struggling for much of 2024, have begun to recover in the past two months, raising expectations for the earnings reports that companies are about to release. Speculation surrounding China’s economic stimulus and the potential boost to US growth under former President Donald Trump have fueled a rally in luxury sector stocks. A Goldman Sachs basket tracking these stocks has surged by 13% since mid-November, outperforming the broader market. However, investors are now seeking confirmation that this optimism is grounded in solid fundamentals.
“Investors are looking for signs of increased confidence and proof that the difficult times are behind us,” said Nick Clay, a fund manager at London-based Redwheel. “What we really want to see is that the suffering has bottomed out in the fourth quarter of last year.”
For investors, the stakes are high. LVMH, the second-largest company in Europe by market value, along with Richemont and Hermes, are significant players in national and regional indexes. A continued rally in luxury stocks could have a positive ripple effect on broader European benchmarks, especially after a challenging year in 2024, during which weak sales in China affected many companies.
Analysts believe that Richemont, which owns Van Cleef & Arpels, is well-positioned to benefit from strong demand in the jewelry sector, which provides a “compelling price to value proposition.” TD Cowen analysts recently upgraded the stock to a “buy” rating.
While the sector is seeing some positive momentum, the bull case hinges on whether executives signal that they are beginning to see signs of stabilization in the market. A significant turnaround in the fourth-quarter results may be unlikely, as China’s property market continues to struggle and rising material costs put pressure on margins.
“The fourth quarter should still be somewhat challenging,” said Jelena Sokolova, an analyst at Morningstar. “It’s difficult to see a clear inflection point yet.”
Stocks serving the wealthiest customers are generally favored by analysts, as they are perceived to be more insulated from global economic swings. LVMH, with 26 buy ratings from analysts, leads the pack, followed by Richemont and Hermes.
Investors will also be paying close attention to how companies undergoing transformations, such as Kering’s Gucci, Burberry, and Hugo Boss AG (BOSS.DE), are performing. Any signs of sustained recovery across the luxury sector will be welcomed.
With valuations now slightly on the expensive side, the focus will be on whether the recovery is justified. Brands like Hermes and Miu Miu from Prada SpA (1913.HK) continue to generate significant buzz, helping to drive their higher price-to-earnings ratios.
“Luxury companies with strong brands have the power to thrive,” said Helen Jewell, Chief Investment Officer of Fundamental Equities EMEA at BlackRock Inc. “Those with real brand strength have been able to maintain their pricing power and are in a very favorable position.”
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