Morgan Stanley warns about European Luxury

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Luxury stocks in Europe faced another downturn on Tuesday, as Morgan Stanley’s financial analysts joined the growing chorus of voices cautioning that the demand for high-end fashion accessories and jewellery in both China and Europe is poised to decelerate.

Shares in the illustrious French luxury conglomerate LVMH tumbled by as much as 2.3%, extending their descent from the year’s zenith to approximately 22%. Similarly, the owner of Cartier, Richemont, witnessed a drop of up to 3.3%, while Kering, the parent company of Gucci, and Burberry Group Plc also experienced declines.

The assessment from Morgan Stanley’s analysts, led by Edouard Aubin, carried a sombre tone as they revised down their projections for organic growth across most luxury firms for the latter half of this year. Furthermore, they made adjustments to their profit forecasts for 2024, underlining that their investigations suggest that demand in China experienced a softening during the summer, and Europe exhibited a parallel frailty.

Despite recent share-price contractions that have brought the luxury sector within the realm of what is often termed ‘value territory,’ Aubin cautioned against rushing to buy in. He remarked, “We anticipate a sluggish quarter-end, which will amplify discussions concerning the normalisation of demand.”

The sentiments expressed by Morgan Stanley’s analysts mirror the prevailing bearish outlook within the sector. Earlier this month, Barclays analyst Carole Madjo scaled back her recommendation for LVMH, with the firm subsequently downgrading its view on the sector from positive to neutral. In a similar vein, Deutsche Bank’s European equity strategists downgraded the consumer products sector, citing the luxury companies’ substantial exposure to the Chinese market. Analysts at Jefferies and Goldman Sachs Group Inc. also foresee turbulent times ahead.

In light of the developments, Morgan Stanley’s Aubin initiated a downgrade for Richemont, shifting it from ‘overweight’ to ‘equal-weight’ status. On the other hand, Prada received an upgrade, progressing from ‘equal-weight’ to ‘overweight.’ The analyst also revised his price targets for various luxury stocks, including LVMH, Kering, and Moncler SpA.

As uncertainties loom large over the luxury sector, investors are grappling with the intricate dynamics of demand fluctuations in China and Europe, navigating the delicate balance between opportunity and risk in this esteemed realm of global commerce.