Which French Stocks to Choose for a Bet on Luxury?

Luxury isn’t merely a product; it’s a statement of lifestyle, a mark of status, and a testament to refined taste. Beyond the world of fashion, handbags, jewellery, and cosmetics, luxury today also encompasses experiences, art, real estate, and more. It represents an indulgence in life’s finer things—a pursuit of quality, craftsmanship, and exclusivity that speaks to discerning consumers around the globe.

In 2024, however, the luxury sector faces an increasingly challenging environment. Economic uncertainties, geopolitical tensions, and inflationary pressures are mounting, casting a shadow over what has historically been a resilient market. As these headwinds gain strength, investors are more discerning, focusing on which French luxury stocks can withstand the storm and potentially emerge stronger. Are all French luxury stocks equally prepared to navigate these challenges? And how can investors make informed decisions amid these shifting market dynamics?

The Challenge of China’s Economic Slowdown

China, a crucial driver of luxury demand, is experiencing a notable slowdown in growth. In the third quarter of 2024, China’s GDP grew by just 4.6%, falling short of the government’s 5% target and marking a decline from the previous quarter. Across the first three quarters of 2024, China’s economic growth averaged 4.8% year-over-year, revealing a gradual deceleration.

Recent data has shown slight signs of stabilisation, with the Chinese Purchasing Managers’ Index (PMI) reaching 50.1 in October—its first expansionary figure since April. Similarly, the non-manufacturing PMI rose to 50.2, indicating a mild improvement in services.

While these metrics suggest a potential uptick in economic activity, challenges remain for China, particularly in its real estate sector, which has long been a cornerstone of its economy. The property market’s ongoing struggles have created a ripple effect, impacting construction, manufacturing, and consumer spending. Weakening consumer and business confidence adds further pressure on the broader economy.

To combat these economic challenges, the Chinese government has introduced various stimulus measures, including increased fiscal spending. An upcoming parliamentary meeting (November 4th–8th) may reveal further details of these plans. In 2023, a similar meeting led to an increase in China’s fiscal deficit from 3% to 3.8%, underscoring the government’s commitment to economic support.

The Luxury Sector’s Stakes in China’s Economy

China’s economic health is of particular interest to the global luxury industry. In 2021, Chinese consumers accounted for over 35% of worldwide luxury sales, a figure expected to rise to 45% by 2030 according to Luxonomy’s forecasts. This year alone, Chinese spending on luxury goods is projected to approach €120 billion, a 33% increase from two years ago according to Mordor Intelligence. However, as China grapples with economic headwinds, there’s growing uncertainty about how this will affect its luxury spending.

Brands with significant exposure to China, such as those in the French luxury market like LVMH, Kering and Hermès, are monitoring these developments closely. For these companies highly reliant on Chinese consumers, adapting to this shifting landscape will be critical in maintaining growth and meeting investor expectations. This reliance underscores the importance of choosing French luxury stocks that are well-positioned to navigate economic pressures and capitalise on China’s recovery.

Are Some French Luxury Brands Standing Out Amid Challenges?

The luxury sector has been under scrutiny as the post-pandemic spending surge has slowed, with particular unease surrounding the waning Chinese demand for high-end fashion. Investors have seen French luxury shares fluctuate, reflecting market anxiety over economic headwinds. However, it’s notable that French luxury giants have weathered these challenges differently, with varying performances among the sector’s leaders.

Kering: Struggling with Gucci’s Revival and its Dependence on China

Kering has faced significant challenges, posting a steeper-than-expected 16% drop in third-quarter revenue to €3.79 billion, compared to analyst expectations of an 11% decline. The company anticipates a sharp drop in annual operating profit, with forecasts suggesting earnings may be nearly halved by year’s end. Much of this decline is attributed to Kering’s flagship brand, Gucci, which has struggled to regain momentum despite ongoing brand revitalization efforts.

With a heavy reliance on consumers seeking status-driven luxury, Kering has been hit hard by the Chinese spending slowdown. This reliance poses questions for Kering’s recovery, as weaker sales in the region could lead to further earnings downgrades. Investors are closely watching how Kering will adapt to a changing luxury landscape and its potential recovery in 2025.

LVMH: The Sector Bellwether Faces a Demand Slowdown

LVMH, often seen as a luxury industry bellwether, reported a concerning decline in demand from Chinese consumers last quarter, citing a dip in confidence that has reached levels last seen during the COVID era. In Q3 2024, the world’s largest luxury conglomerate reported revenue of €19.08 billion, down from €19.964 billion a year earlier, and a striking 10% drop from €21.206 billion in Q2. This marks LVMH’s most significant quarterly decline since 2020.

The company faces an “uncertain economic and geopolitical environment,” leading to cautious yearly growth projections. Like Kering, LVMH is contending with the effects of weaker Chinese consumer spending, which has taken a toll on sales, especially in high-end fashion. As the group navigates these challenges, it remains to be seen how LVMH will balance its global presence with the pressures of slower Chinese demand.

Hermès: A Standout Resilient Performer

In stark contrast to Kering and LVMH, Hermès has maintained its growth trajectory. Benefiting from a resilient and affluent clientele, Hermès reported a 10% year-over-year increase in Q3 2024 consolidated revenue, reaching €3.7 billion. The brand’s business model is anchored in meticulous craftsmanship and strict inventory control, reinforcing its exclusivity. This strategy enables Hermès to weather market fluctuations better than its competitors, particularly in iconic products like its handbags, which command high prices and have extensive waiting lists.

Hermès’ unique positioning and selective production methods shield it from the broader luxury market’s volatility, particularly the demand slowdown in China. This resilience sets Hermès apart, suggesting that its business model could continue to drive steady growth even as other luxury brands face more unpredictable conditions.

Bottom Line

The global luxury market, valued at approximately €320 billion in 2021, is on track to almost double, potentially reaching €600 billion by 2030, according to Luxonomy. This impressive projection underscores the resilience and adaptability of luxury brands in meeting global demand for premium goods.

Despite these promising forecasts, however, growth is expected to slow in the near term due to a tougher economic climate. McKinsey estimates that global luxury sales will grow by just 3–5% in 2024, down from 5–7% in 2023, as consumers dial back their spending following the post-pandemic surge.

The impact of this slowdown will likely vary across regions, with growth in Europe and China set to decelerate. Meanwhile, the U.S. market may rebound after a sluggish 2023, potentially adding some stability to global luxury sales. Yet, luxury brands that can adapt to shifting consumer dynamics and regional trends are positioned to remain attractive investments over the long term.

For investors, focusing on companies that blend tradition with innovation could be key. Brands adopting sustainable and ethical practices will be better aligned with the expectations of increasingly eco-conscious consumers. In this vein, companies like Hermès, which prioritise quality craftsmanship and exclusive, high-value products, may continue to outperform in challenging conditions.

Technology will also play a pivotal role in driving growth, with digital tools such as artificial intelligence, metaverse, and mixed reality promising to transform customer experiences, enhance personalization, and streamline operations. These advancements are likely to strengthen customer loyalty and reinforce the exclusivity that defines the luxury sector.

Ultimately, while the luxury sector remains a compelling long-term investment, success will depend on a brand’s agility in responding to both consumer demands and economic pressures. As investors evaluate the French luxury giants, factors such as market adaptability, sustainability initiatives, and strategic use of technology will be crucial in determining which brands are best positioned to navigate the challenges and opportunities ahead.

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