European Luxury Stocks Face Potential Decline in Popularity

Europe’s Luxury brands may have sparkled at Paris Fashion Week, but investors are questioning their taste for the shares in the face of a Chinese slowdown and interest rate uncertainty.

LVMH, Hermes, and Kering are among the biggest names in Europe’s luxury goods sector. These high-end retailers, along with France’s top stock market performer Accor, have been the best performers on the continent this year as hopes of a recovery in China and a post-pandemic U.S. spending boom boosted earnings and their stock prices.

But red flags that China reopening bets may have hit their peak are piling up, as a raft of data points to a slowdown. China’s economic growth is cooling, retail sales have fallen short of forecasts, and factory activity has slowed, indicating that consumption may have peaked.

Luxury firms also have some of the industry’s highest debt-to-asset ratios, making them vulnerable to rising interest rates. Interest rates are already putting pressure on consumer spending, which makes up 70 percent of the economy. Those pressures could grow if the Federal Reserve decides to raise rates at its next policy meeting in late September.

Investors still value LVMH and Hermes at a premium to the STOXX Europe index, but that gap is narrowing as multiples rise relative to the market. Hermes, for example, trades at around 50 times forward earnings, nearly the same as Nvidia Corp, the world’s hottest tech stock.

For many investors, the question is no longer whether luxury goods will recover from their recent slump but how much further they can fall before their appeal fades. If that happens, cheaper labels like U.K.’s Primark would likely gain share and push luxury brands out of the mainstream.

The best way to play a possible recovery in luxury goods is to own the companies that make them, but keep in mind that these stocks are not immune to broader market shifts and that the outlook for luxury goods sales remains uncertain. As with any stock, vet your picks and closely monitor the earnings reports. It would help if you diversified your holdings to spread your risk and ensure you have a strong discount broker to help you navigate market volatility.

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