Steer clear of European luxury stocks, says RBC, as Citi upgrades the sector

However, performance has tailed off since, amid concerns about slowing demand from the likes of China. And in a new note, Piral Dadhania, equity analyst at RBC, gives a number of reasons why he is more cautious on the European luxury sector.

First off, he perceives the end of the current luxury supercycle. The market size is now roughly 24% above 2019 levels, he notes, with recent growth rates above average for most of the companies RBC covers. “This is not sustainable, and we expect moderating revenue growth trends from here,” Dadhania says.

Next, he observes that luxury downturns have occurred three times since 2010, last on average for four quarters and with 12% share price declines as price/earnings multiples de-rate. “Comparability may be limited vs. today given differences in interest rates, inflation and China macro, which suggests this current downturn could be more pronounced,” says Dadhania.

Finally, macro-economic headwinds such as higher non-discretionary costs like rent and mortgages are the worst in decades, RBC reckons. This means the aspirational consumer, which RBC believes number roughly 165 million globally, and which have been an important driver of luxury demand, are “less visible today,”

All told, RBC estimates full year 2024 earnings for luxury will be 3-8% below market consensus. Relative to the struggling sector, RBC has an outperform rating on LVMH and Kering
KER,
-0.60%,
while the bank downgraded Richemont to sector perform.

“LVMH offers the best downside protection on margins in our view, whilst Kering is our preferred turnaround idea at an attractive valuation. We also upgrade EssilorLuxottica
EL,
-0.91%
to sector perform. In sporting goods, we prefer Puma
PUM,
+1.05%,
” says Dadhania.

Still, a market is about opinions, and in another note landing at the start of the week, Beata Manthey, analyst at Citi, takes the other side of the trade.

“Luxury Goods has been the worst performing European sector recently,” she says. “The previous positive sentiment and outperformance post China reopening has now unwound, while fundamentals remain stable. The sector looks oversold, especially as key headwinds (higher rates, China slowdown) could soon abate. We upgrade to overweight.”

Manthey favors LVMH, Richemont
CFR,
-0.63%
and Moncler
MONC,
-1.38%
among others whose shares have underperformed of late.