(News Bulletin 247) – The German bank published a note on Tuesday in which it underlines that the sector is trading with a demanding premium in view of its historical prices. She recommends Richemont, Swatch and Moncler for purchase, but neither LVMH nor Hermès.

This is the large sector which has enabled the CAC 40 to record a fine 2023 vintage so far: luxury. Since the beginning of the year, Hermès and LVMH, sign respectively the first and the sixth strongest increase of the Parisian index (+32% and 23.9%). Penalized by the creative transition at Gucci, which translates into much lower growth, Kering is lagging behind (+11%).

Beyond the three-color groups, all the stocks in the European compartment are on the rise, the Stoxx Europe Luxury 10 – a pan-European index compiled by Qontigo – has gained 22% since the start of the year. Even the Nasdaq and its performance boosted by the enthusiasm around generational AI and ChatGPT is not doing as well (+21.5%).

The earnings season, which was generally very good, except for Burberry, confirmed the sparkling form of the sector, which had first been buoyed by announcements of the reopening of the Chinese economy at the start of the year. .

Demanding valuation premiums

But aren’t stocks in this sector hitting a glass ceiling? Deutsche Bank considers in any case that it is now necessary to be rigorous. The German bank published a note on Tuesday whose simple title “it’s time to be more selective” sums up its point very well.

The establishment from across the Rhine notes that the luxury groups recorded strong growth in their sales over the first three months of the year, thanks to the start of the rebound in China and the resistance of Europe. However, the slowdown in growth in the United States, “is becoming more and more a source of concern, given the signs of weakening demand from the side of the most aspirational consumers. [qui se dirigent vers les marques les moins onéreuses et plus dans l’ère de temps au contraire de grands noms intemporels comme Louis Vuitton, NDLR]“, points the bank.

Above all, the research department emphasizes that luxury is a very consensual investment theme for purchases and is widely played by market operators. The bank notes that the sector is trading at multiples showing a historically high premium compared to other European stocks, with a “price to expected earnings” ratio of 24.

“Given this valuation premium, we are more cautious and believe that investors will be more selective in the second quarter,” judge Deutsche Bank.

Hermès and LVMH under pressure

The German institution thus favors groups that have both high exposure to China and low exposure to the United States, while having a rather attractive valuation.

This leads him to retain three values. Deutsche Bank devotes the Swiss Richemont, which according to it offers the best geographical distribution. The group owns “hard luxury” brands (such as Cartier and Van Cleef) and, in addition, displays a discount of more than 10% compared to its comparables. The German bank also recommends the watch manufacturer Swatch for purchase, as well as the down jacket specialist Moncler, whose brand dynamics and ability to seize Chinese demand it praises.

As you have noticed, the French luxury groups are absent from this selection, Deutsche Bank having a recommendation to “keep” on LVMH, Hermès and Kering.

“For LVMH and Hermès, we continue to believe that the two titles (..) offer defensive exposure to the luxury sector thanks to their diversification and their affluent clientele respectively,” explains the bank. However, the German establishment believes that their valuation premiums are already pricing in a significant improvement in their earnings and thus sees more potential in other names in the sector.

It specifies however that, of the two, LVMH is the stock which seems to have the most upside potential, due to its offer of differentiated brands and a less stretched valuation, while for its part Hermès presents a level of premium unique in the sector.

As for Kering, Deutsche Bank explains that, as for the Italian Salvatore Ferragamo, it is showing caution while waiting for signs of improvement on the creative transition of the group.

On the Paris Stock Exchange, the advice of Deutsche Bank seems to find an echo since Hermès fell 5.4%, accusing the largest drop in the CAC 40, LVMH lost 4.2% and Kering gave up 2.6%. Conversely Richemont on the Zurich Stock Exchange resists and wins 0.7%.

“A priori, there are no factors other than Deutsche Bank’s research rating that can explain the downward movement in stocks. And it is true that it is becoming complicated to look for ‘upside’ (potential increase, Editor’s note) on the sector”, judges a Parisian analyst.