European Luxury Stocks Plummet as China Demand Collapses: Zero Growth Reality Hits 2024

European Luxury Stocks Tumble as China’s Demand Slump Hits 2024 Growth: A Pivotal Market Shift

As we enter the final quarter of 2024, European luxury stocks are feeling the full force of a dramatic market downturn. Major brands like LVMH, Kering, and Hermès are reeling from a severe slowdown in demand from China—once their most lucrative market. With the year almost over, the luxury sector is on track for zero growth, a stark contrast to the 5% expansion predicted earlier in the year by Goldman Sachs.

Zero Growth Becomes Reality in 2024

Goldman Sachs’ forecast at the start of 2024 was bullish, projecting solid growth for luxury brands across Europe. But by September, it’s clear that this optimism was misplaced. The reality? Zero growth. A significant portion of this decline is being driven by ongoing issues in China, where the post-pandemic recovery has been far slower than anticipated.

The Goldman Sachs luxury index has dropped significantly, reaching its lowest point since late 2022, as stocks of top luxury brands have taken a beating throughout the year. And if you think the worst is behind us, think again—China's demand shows no signs of recovery, and the once-booming luxury sector is grappling with the fallout.

China’s Economic Slowdown: The Key Culprit

China, once the growth engine of the luxury world, has hit a wall. The country’s economic slowdown has curbed the spending power of its affluent middle and upper classes. Regulatory uncertainties, a faltering property market, and cautious consumer sentiment have combined to stifle demand for luxury goods both at home and abroad. Chinese tourists, a cornerstone of the global luxury market, have yet to return in full force, further hurting luxury retailers in Europe and beyond.

This isn’t just a temporary blip. The luxury sector’s reliance on China for growth has created a vulnerable situation. If China’s economy doesn’t pick up by 2025, we could be looking at a long-term structural shift in how these brands do business.

Jefferies and Morgan Stanley: Still No Rebound in Sight

It’s not just Goldman Sachs sounding the alarm. Jefferies analysts continue to hold a "Neutral" rating on major luxury stocks like LVMH, citing a choppy market environment and further revisions to earnings expectations for 2024. Their predictions remain below average, and they don’t see Chinese demand recovering anytime soon.

Meanwhile, Morgan Stanley has also joined the chorus of cautious voices. Their analysts have downgraded profit forecasts for the entire second half of 2024. As we head into Q4, they’re advising investors to remain cautious, warning that the current stock price drops might not represent the buying opportunity some had hoped for.

European Market Struggles Compound the Problem

While China remains the most significant concern, Europe isn’t immune to luxury's market woes. Inflation and rising interest rates are squeezing consumers’ discretionary spending, leading to weaker demand for high-end goods. On top of that, fewer Chinese tourists visiting Europe’s luxury shopping hotspots have hurt sales, particularly in cities like Paris, Milan, and London, where these travelers typically spend big.

The high valuations that European luxury stocks enjoyed post-pandemic are now a distant memory. The sector is undergoing a painful but necessary correction, as the lofty expectations of continued rapid growth fall back to more realistic levels. Since March, the Goldman Sachs luxury stock index has shed a staggering $240 billion in value. Brands like Kering and Hugo Boss have seen their valuations nearly halved, while LVMH has slipped from being Europe’s most valuable company.

What’s Next for the Luxury Sector?

The question on everyone’s mind: Will luxury stocks recover in 2025? While the immediate outlook is bleak, some signs suggest that a mid-term recovery could be possible if global economic conditions stabilize.

Scenario 1: Continued Decline in Chinese Demand

If China’s economic woes persist, we can expect further declines in luxury stock prices. Under this scenario, brands with heavy reliance on the Chinese market could struggle to survive or even face consolidation. Investors should prepare for more volatility as stock prices adjust to this new reality.

Scenario 2: Policy-Driven Rebound in China

A more optimistic outcome could occur if the Chinese government introduces stimulus measures to revive consumer spending. If such policies materialize, demand for luxury goods in China could surge, lifting stock prices for brands like LVMH and Hermès, which have a strong foothold in the Chinese market.

Scenario 3: Long-Term Structural Shift

However, the bigger story might be a longer-term shift in consumer behavior. Millennials and Gen Z are increasingly favoring sustainability, authenticity, and experiences over traditional luxury goods. This trend could force luxury brands to pivot toward ethical production, secondhand markets, and digital-first strategies to stay relevant.

A New Generation of Consumers: Millennials and Gen Z Lead the Shift

The luxury market’s younger consumers aren’t just buying flashy logos—they’re demanding more meaningful experiences and responsible consumption. Millennials and Gen Z, who will dominate luxury spending in the coming years, place high value on sustainability, which is putting pressure on traditional luxury brands to innovate or risk losing relevance.

Luxury brands that fail to align with these consumer values are at risk of becoming outdated. Those that double down on sustainable practices, digital engagement, and limited-edition collaborations could emerge as winners, capturing the loyalty of this younger, more conscientious demographic.

What to Expect for Q4 and Beyond

With just a few months left in 2024, the luxury sector’s performance will likely remain volatile. Investors should watch China closely for any signs of economic stimulus or policy changes that could boost consumer confidence and spending. Meanwhile, the European market continues to face its own headwinds as inflation and interest rates remain elevated.

Final Thoughts: Opportunities Amid the Chaos?

Despite the challenging environment, there’s still potential for long-term investors. Luxury brands with strong global presence and ultra-luxury products like Hermès may be better positioned to weather the storm. In fact, Hermès has traditionally shown resilience in downturns, thanks to its ultra-wealthy customer base that is less sensitive to economic fluctuations.

For now, though, caution is key. The luxury sector faces a pivotal moment, and the next few months could shape its future for years to come. Keep a close eye on China, shifting consumer preferences, and broader economic conditions—because luxury’s next move is anything but guaranteed.

Key Takeaways

• European luxury-goods stocks are sliding due to warnings from Goldman Sachs and Jefferies about a decline in earnings.
• Goldman Sachs has adjusted its forecast, projecting zero growth in the luxury sector this year, a significant downgrade from their initial 5% expansion forecast.
• China's ongoing demand challenges are continuing to exert pressure on luxury-goods makers.
• Luxury stocks have plummeted to their lowest level since late 2022.
• Analysts anticipate further earnings difficulties for luxury brands.

Analysis

The persistent downturn in demand in China is driving down European luxury-goods stocks, exerting significant impacts on major brands and their investors. The market fears have been intensified by the downgrades from Goldman Sachs and Jefferies, resulting in the 3.2% drop and zero growth forecast for 2024. In the short term, luxury brands are confronted with earnings pressures and potential layoffs, while in the long term, reduced investment and innovation may impede industry recovery. China's economic deceleration and evolving consumer preferences serve as crucial indirect factors. European luxury firms, their suppliers, and investors in luxury ETFs are directly feeling the effects.

Did You Know?

• Goldman Sachs-tracked basket: This refers to a portfolio or index of stocks closely monitored by Goldman Sachs, often utilized to track the performance of a specific sector or industry. In this instance, it signifies a collection of European luxury-goods stocks identified by Goldman Sachs as key indicators of the sector's health.
• Zero growth for the industry this year: This is Goldman Sachs' prediction that the luxury goods industry will not experience any increase in revenue or profit throughout the year. The forecast represents a substantial downgrade from their earlier projection of a 5% expansion, signifying a notably pessimistic outlook due to ongoing challenges.
• China's demand woes: This term refers to the difficulties encountered by luxury goods companies in sustaining or increasing sales in China, a vital market for luxury brands. These challenges could stem from various factors such as economic deceleration, shifts in consumer behavior, or geopolitical tensions affecting purchasing power and consumer confidence.