French stocks are the breakout stars of 2023, fuelled by the relentless momentum behind luxury-goods producers LVMH, Kering and Hermes International.
The benchmark CAC 40 Index is up 14 per cent in 2023, outpacing other major markets and putting it on the cusp of eclipsing the record closing high set in January 2022.
The trio of luxury companies, plus cosmetics maker L’Oreal, account for more than a third of the gain. Investors are betting their sales and earnings will hold up now that a key market, China, is open for business again.
For now, the rally is confounding sceptics who expected surging inflation, rising interest rates, China’s pandemic lockdowns and the spectre of a possible recession would finally bring stock prices back to earth.
Luxury stocks are showing the kind of momentum that large technology companies did in the 2021 bull market.
“Luxury stocks have been an investor favourite for a while now, but the fact that the big tech stocks don’t have much wind in their sails at the moment is putting the spotlight on them, especially with the Chinese economy reopening,” said Mr Roland Kaloyan, head of European equity strategy at Societe Generale.
The CAC’s gain in 2023 is on a par with that of the Nasdaq 100 Index, the high-octane technology-stock benchmark in the United States.
Yet even as rising interest rates and slowing sales have weighed on the outlook for tech, luxury has powered ahead. Demand has held up for clothing, handbags, champagne, watches and perfume, with producers finding no difficulty in raising prices and beating inflation.
Forced to stay home because of the government’s Covid-Zero policy, Chinese consumers saved one-third of their income in 2022, depositing 17.8 trillion yuan (S$3.5 trillion) into banks which investors hope will be partially converted into leather handbags worth thousands of dollars.
“Luxury goods demand has been little affected by the pressure of rising inflation, in contrast to mass-market consumption, as the most affluent households have benefited in recent years from rising wealth and also from a huge stock of excess cash savings accumulated over the Covid-19 lockdown periods,” said Mr Edmund Shing, global chief investment officer at BNP Paribas Wealth Management.
Analysts at UBS say 2023 will be the “year of the Chinese consumer”, noting that the pandemic restrictions pushed down the share of Chinese consumers in global luxury spending to 17 per cent last year, compared with 33 per cent before the pandemic.
Investors value LVMH and Hermes above their average 10-year earnings multiple, while Kering is in line with the average. Analysts also see relatively little upside for the group – their aggregate price targets imply a 4.4 per cent gain for LVMH’s stock over the next year, a 5.7 per cent increase for Kering and a 9.6 per cent drop for Hermes.
Still, earnings reports over the past few weeks have showed that even though investors had sky-high expectations for these stocks, they were willing to look past any slight snags and focus on evidence that sales in China are recovering from the pandemic lockdowns.
The resilience and size of the luxury industry – LVMH, with a market value of US$439 billion (S$586 billion), is Europe’s largest company – means France punches above its weight in terms of global markets. While it is the world’s seventh-biggest economy as measured by gross domestic product, it is the fifth-biggest stock market and the largest in Europe, a crown it took from Britain in 2022.
“The Chinese clientele is much more important than it was in 2019,” LVMH financial director Jean-Jacques Guiony told journalists. Mr Guiony does not expect Chinese tourists to return to Europe, where they traditionally spent heavily on luxury goods, before 2024.
Instead, luxury groups are focusing on Chinese consumers at home.
China is a “volcano ready to explode”, said Mr Arnaud Cadart at asset manager Flornoy Ferri.
“There is an incredible amount of savings that has been built up, an incredible reserve in the hands of the well-off class which wants to purchase luxury goods,” he added.
Beyond luxury stocks, industrial companies Schneider Electric – another China beneficiary – and Air Liquide have been big contributors to the surge, as has Vinci, a construction company and operator of toll roads. Financial stocks also account for almost 10 per cent of the CAC’s weighting, and its three banks have risen 19 per cent or more, led by BNP Paribas.
France’s banking sector is increasingly attractive given its low valuations and rising interest rates, said Mr Kevin Thozet, a member of the investment committee at Carmignac Gestion in Paris.
Even after this year’s gains, the CAC is priced at less than 13 times estimated earnings, below its 10-year average of 14, encouraging fund managers that the gains for the broad market have further to go.
While the broader French market still looks relatively cheap, concerns are creeping in that luxury in particular is too expensive. Societe Generale’s Kaloyan recently cut the sector to neutral after its relative valuation multiples rose back to their historic highs.
Source : The Straits Times
