LVMH and the Luxury Industry: A Shift in Fortunes Expected to Reverse in 2024

In 2024, LVMH and other high-end goods shares are poised to experience the year quite differently to 2023.

Although China's reopening in 2023 prompted a burst of spending on luxury items like high-end handbags and jewelry, this process seems to have depleted, and investors predict that 2024 will start off weak before recovering in the second half. Luxury shares such as Richemont and Gucci's parent company, Kering SA, are expected to experience this "second half" comeback, according to BNP Paribas analysts.

The robust start to 2023 that momentarily brought LVMH beyond a market value of half a trillion dollars is already fading. A collection of economic data indicating a slowing recovery in China has dampened sentiment, even though Chinese consumers represent about 25% of the projected global luxury market of €362 billion ($397 billion), with forecasts suggesting this could rise to 40% by 2030.

Chinese customers regaining their demand will be crucial for supporting hopes of a healthier second half of 2024.

Flavio Cereda, an investment manager at GAM UK Ltd, believes the current volatility will settle. "By Easter, I would be shocked if we didn't see indications that the situation is starting to improve," he said.

The resilience of the luxury sector during the pandemic, similar to the tech sector’s dominance in the U.S, has highlighted its timeless appeal. Iconic brands' price-setting capacity usually outperforms inflation, safeguarding their profit margins.

Hermès International's sought-after handbags, which can cost anywhere from approximately $8,000 to tens of thousands, are in constant demand, with company shares hitting record levels this past week despite the downturn of the industry.

Some investors see an opportunity to boost their portfolio with companies like LVMH and Richemont, given they are still over 15% below their 2023 peak.

Raphael Thuin, head of capital markets strategies at Tikehau Capital, explained, “We were hesitant to invest when valuations were at a peak, but with the recent market downturn, we are ready to invest in this sector again."

However, analyst Chris Gao at CLSA Ltd warns of an unfavorable first quarter since Chinese buyers maxed out their spending in the same period of 2023.

Deborah Aitken from Bloomberg Intelligence believes the second half of 2024 will be easier, assisted by growth in tourism and increased demand from Chinese consumers

Conversely, Telsey Advisory Group CEO Dana Telsey warns that customers who contributed to the super-cycle luxury trend may not return, shifting their focus to experiences instead of goods.

Referencing potential weaker demand and an uncertain economic forecast, brokers are reassessing the sector. LVMH was recently downgraded to a neutral stance by JPMorgan and Morgan Stanley. HSBC has also lowered its sector share price targets, claiming that this industry is not immune to recession.

Nevertheless, the strength of luxury brands typically makes these companies more resilient than other consumer sectors, according to GAM’s Cereda. However, Olivier Rudigoz, a portfolio manager at BNP Paribas Asset Management, notes that momentum investors may hold off in the short term due to a lack of triggers. He states, "For long-term investors, we believe this industry is slightly advantageous, particularly with the emerging middle class in China and other developing countries."