After a banner year for luxury companies in 2021, the outlook for 2022 was looking relatively good.
Last year, sales of goods (as opposed to experiences) rebounded from an early pandemic dip to above their pre-Covid-19 level.
Consumers were spending more on luxury home furnishings, luxury cars, collectible art and liquor, and expensive digital assets – with the biggest increase in sales of high-end clothing, bags and accessories.
This has allowed many retailers to record financial results and increase their share prices – for example, France’s LVMH, the world’s largest luxury company, saw revenues up 20% before 2019 and 44% before 2020, and has increased its share price by more than 40% through 2021.
However, despite rising over the past week, LVMH is down 14.27% this year. The same trajectory was seen across all major 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 made them obsolete and how ugly is the outlook?
Luca Solca, senior global luxury goods analyst at Bernstein, points to two main factors that have affected luxury stocks this year.
First, the market is pricing in the likelihood of monetary conditions tightening, and this anticipation produces a move into value and financials.
The US Federal Reserve and the UK’s Bank of England are expected to raise interest rates this week as the European Central Bank ends its aggressive government bond buying program.
Year-to-date, analysts have observed investors turning away from so-called “growth stocks” such as technology companies, which derive much of their value from projected future cash flows and are therefore lower when the rates are higher; to “value stocks”, which generally pay reliable dividends and are less shaken by risk aversion sentiment, and to bank stocks, which can benefit from higher rates.
War in Europe
Second – and most importantly – Solca notes attempts to gauge the likelihood of more moderate global gross domestic product (GDP) growth amid punitive sanctions against Russia following its invasion of Ukraine.
The impact of soaring inflation, volatile commodity markets and ongoing supply chain issues caused by the coronavirus pandemic has led analysts to raise the prospect of a recession in the UK. United, throughout Europe and the United States.
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 surrounding the global economic recovery and the slowdown in its real estate sector.
And while much of the world returns to pre-Covid-19 normality, with restrictions lifted in much of Europe and the Americas and countries like Australia and New Zealand reopening, some parts of China are seeing new lockdowns introduced amid new waves of Covid-19, while Hong Kong is seeing a massive rise in cases and deaths that are prompting new restrictions.
“Luxury goods have proven to be cyclical in the past and therefore the decline in global GDP growth appears to be negatively impacting their outlook,” Solca told Capital.com.
“The jury is out on the global economy’s ability to absorb the ripple effect of Russia’s cut, and how much that will hurt global growth prospects.”
The uncertainty ahead became clear today, when optimism over the end of the war in Ukraine and news of a draft 15-point peace deal sent luxury stocks sharply higher.
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 from Bain & Company, which publishes an annual report on the global luxury market, estimate that Russian luxury customers represent around 2-3% of the total luxury goods market, with a similar percentage from the luxury goods segment. personal items, including accessories, clothing and beauty.
While noting the difficulty of making predictions in such a fast-paced situation, Claudia D’Arpizio, Global Head of Fashion and Luxury at Bain, said: “We are seeing a more likely, immediate and relevant impact on the personal spending of luxury of Russians at the local level, strongly driven by the devaluation of the local currency and the restrictions in place.
“Russian spending abroad (mostly directed to Western Europe) will be significantly halted as long as closures of European airspace to Russian civil airlines are in place.”
Federica Levato, head of the EMEA luxury practice at Bain, added: “Outside of Russia, we see potential impacts on the European and US regions, which could take place if the current crisis intensifies or persists and causes more serious economic and financial consequences”.
“Further increases in energy prices could have an impact on GDP growth in European countries, also undermining the confidence of local consumers of luxury goods and leading to a reduction in discretionary spending by European consumers.
“Western Europe could also see a drop in tourist flows (in the short term from the United States), if it is perceived as less safe due to the proximity of the conflicts. If the crisis persists, financial stability could also be affected, notably generating greater stock market volatility. US consumer confidence (strongly linked to stock market fluctuations) could potentially decline and possibly also their luxury spending.
However, Levato also noted that the likelihood of this is low at the moment and depends 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.