The Big Bet on Luxury Stocks Stumbles on Inflation, China Woes

(Bloomberg) — Problems are stacking up for Europe’s hottest sector.

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A warning from the chairman of Cartier-owner Richemont that stubborn inflation was starting to affect demand in Europe prompted a swoon in luxury stocks last week. That downbeat message added to a string of worrying economic signals from China and signs of softer trends in the US.

It’s all testing investors’ faith in this pricey sector and raising questions about the theory that luxury stocks are the Europe’s strongest response to Wall Street’s high-flying tech stocks. Some $180 billion has already been wiped out since a recent peak in July, leaving gains for the year hanging by a thread. LVMH accounted for about 60% of that slump alone and the maker of Louis Vuitton bags got overtaken by drugmaker Novo Nordisk A/S as Europe’s largest company in the process.

A stuttering recovery in China, the source of as much as a fifth of European luxury retailers’ sales, has dealt the biggest blow to the sector. But the malaise has spread to the high-end shopping districts of Paris, Madrid and London. “In Europe, ongoing inflation is starting to impact local demand,” Rupert told Richemont shareholders at its annual meeting in Geneva on Wednesday.

“What we are seeing on luxury is the end of a consensual ‘long,’” said Gilles Guibout, a portfolio manager at Axa Investment Managers in Paris, referring to a rush by investors toward this sector in the first half of the year. “Europe is typically very sensitive to world growth and this is hurting luxury as there is evidence of a slowdown.”

Guibout has an underweight position on luxury and doesn’t plan to buy the stocks until a further pullback makes them more attractive.

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The latest survey of China’s services industries revealed more negative data for luxury names, with the slowest expansion this year in August. That suggests the nation’s consumers aren’t optimistic about their future income because of the faltering economy and are tending to save rather than spend.

And soaring bond yields have…


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