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Things are unlikely to get rosier any time soon for Europe’s embattled luxury-goods stocks as the second half of the year looks harder to navigate, according to HSBC Holdings Plc analysts.
Industry bellwether LVMH and Burberry Group Plc extended recent declines on Wednesday as the broker downgraded both to hold, saying the soft luxury scene — for which the French company is a proxy — is likely to stay tricky, while upside is now limited for the UK fashion brand after its recent promising turnaround attempts.
The sector has been under pressure this year, weighed down by weak demand in the key market of China and the impact on tourist spending from war in the Middle East. A Goldman Sachs Group Inc. basket of luxury stocks is down 13 percent year-to-date and LVMH is trading at its lowest absolute price-to-earnings ratio in 10 years.
Softer momentum in mainland China, negative social media reaction around a trademark dispute between LVMH and Molly Tea, and a declining pace of sales in South Korea and North America are among factors that could weigh on the luxury sector in coming months, according to a team led by HSBC’s Anne-Laure Bismuth.
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“Investors shouldn’t buy a stock because it looks cheap on valuation or as margins are rising, but because the second derivative of sales growth is improving,” Bismuth wrote. “We don’t see scope for more constructive momentum” in the second half.
By Isolde MacDonogh
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