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Luxury stocks are down in 2022 – has their outlook soured?

15:24, 16 March 2022

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Luxury shops at the Bellagio Casino in Las Vegas
Louis Vuitton owner LVMH rose to new highs last year, but its stock has fallen in 2022 – Photo: ehrlif / Alamy Stock Photo

Following a banner year for luxury businesses in 2021, the outlook for 2022 looked relatively rosy. 

Last year, sales of goods (as opposed to experiences) rebounded from an early-pandemic drop off to above their pre-Covid-19 level. 

Consumers were spending more on fancy home furnishings, luxury cars, collectable art and alcohol, and pricey digital assets – with the biggest increase in sales of high-end clothes, bags and accessories. 

That sent numerous retailers to record financial results and boosted their share prices – for example France’s LVMH, the world’s biggest luxury business, reported revenue up 20% ahead of 2019 and 44% ahead of 2020, and increased its share price by more than 40% through 2021. 

However, despite an uplift over the last week, LVMH is down 14.27% this year. The same trajectory has been seen across all the big European luxury brands – Kering (KER) is down 16.8%, Burberry (BRBY) is down 8.5%, Richemont (CFR) is down 24%, Christian Dior (CDI) is down 17% and Hermes (RMS) is down 21%. 

What’s sent them out of fashion, and how ugly is the outlook?

Monetary effects 

Luca Solca, a senior analyst in global luxury goods at Bernstein, points to two main factors that have hit luxury shares this year. 

Firstly, the market is factoring in the probability of tighter monetary conditions, and this expectation is producing a shift to value and financial stocks. 

Both the US Federal Reserve and the UK’s Bank of England are expected to raise interest rates this week, while the European Central Bank is wrapping up its aggressive government bond-buying programme. 

Since the start of the year, analysts have observed investors moving from so-called ‘growth stocks’ such as tech companies, which derive much of their value from cash flows predicted for the future and are consequently lower when rates are higher; to ‘value stocks’, which generally pay reliable dividends and are less rattled by risk-off sentiment, and bank stocks, which may benefit from higher rates. 

War in Europe 

Secondly – and crucially – Solca notes attempts to price in the likelihood of more moderate global gross domestic product (GDP) growth amid punishing sanctions on Russia following its invasion of Ukraine.

The impact of soaring inflation, volatile commodity markets and persistent supply chain issues sparked by the coronavirus pandemic have led analysts to raise the prospect of recession in the UK, across Europe and in the US

Last week, China – which accounts for 20-21% of global luxury sales – said it would target slower economic growth of around 5.5% this year due to uncertainties around the global economic recovery and the downturn in its property sector. 

And while much of the world is returning to a pre-Covid-19 normality, with restrictions lifted in much of Europe and the Americas and countries like Australia and New Zealand reopening, parts of China are seeing new lockdowns introduced amid new Covid-19 waves, while Hong Kong is seeing a massive rise in cases and deaths which are leading to new restrictions. 

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“Luxury goods have proven to be cyclical in the past, and as a consequence lower global GDP growth is seen to negatively impact their prospects,” Solca told Capital.com. 

“The jury is out on the ability of the global economy to absorb the ripple effect from cutting Russia off, and to what extent this will damage global growth prospects.”

The uncertainty ahead was made clear today, when optimism over the end of the war in Ukraine and news of a 15-point draft peace deal sent luxury stocks significantly higher. 

Russia sanctions

Luxury goods have been a specific target of Russian sanctions, with the UK and EU banning the export of items worth more than €300 ($330) to the country. 

Analysts at Bain & Company, which releases an annual report on the global luxury market, estimate Russian luxury customers to account for c.2-3% of the total luxury goods market, with a similar percentage of the personal luxury goods segment including accessories, apparel and beauty.

While noting the difficulty of making predictions during such a fast-moving situation, Claudia D’Arpizio, Bain’s global head of fashion and luxury, said: “We see a more likely, immediate and relevant impact on Russians’ personal luxury spending locally, strongly driven by local currency devaluation and restrictions in place.”

“Russian spending abroad (mainly directed to Western Europe) will be drastically interrupted as long as the shut-downs of European airspace to Russian civil airlines are in place.”

Wider impact

Federica Levato, leader of EMEA luxury practice at Bain, added: “Moving outside Russia, we see potential impacts on European and American regions, which could take place if the current crisis escalates or persists and leads to more serious economic and financial consequences.”

“Further energy price increases could potentially impact European countries’ GDP growth, also undermining local luxury consumer confidence and leading to a reduction of discretionary spending of European consumers. 

“Western Europe could also see a decline of touristic in-flows (in the short term from the US), if it is perceived less safe due to proximity of the conflicts. Upon persistence of the crisis, financial stability could be also affected, particularly generating higher stock market volatility. American consumer confidence (highly linked to stock fluctuations) could potentially decline and eventually also their luxury spending.”

However, Levato also noted the likelihood of this was low for now, and dependent on the future of the conflict. 

For now, the outlook for luxury – as for other retailers grappling with rising costs, supply chain challenges and the threat of a cost of living crisis – remains muddy. 

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