Luxury stocks poised for ‘sharp reversal’ if Middle East conflict subsides: Deutsche
A recovery in European luxury stocks has been upended by the Iran war, but they could see a “sharp reversal” if the geopolitical situation improves, Deutsche Bank said on Wednesday. Shares of major players like LVMH , Kering , Richemont and Hermes are down between 10% and 20% since the first attacks on Iran on Feb. 28. This has wiped out around $100 billion in market cap from luxury companies, as the Middle East has been a growth driver for the sector after years of stagnation elsewhere. MC-FR KER-FR,CFR-CH,RMS-FR,BRBY-GB YTD mountain Luxury stocks have fallen since the Iran war began on Feb. 28. Even as earnings estimates are coming down, Deutsche Bank analysts see it as a “cyclical de-rating,” expecting valuations to bounce back quickly once the macro outlook improves. “The timing will be uncertain but we expect the growth algorithm to return, driven by the US and Chinese consumers,” the analysts wrote in a note Wednesday. Even so, they cut price targets on conglomerate and sector bellwether LVMH by 14% to 620 euros, maintaining a Buy rating on the stock. The broker also cut price targets on Burberry , Hermes, Moncler and Kering by between 2% and 5%. The analysts downgraded earnings expectations for the sector’s first-quarter reporting season, beginning later this month and now forecast growth of 3%, down from 6%. “We prefer Hermes for its more defensive nature, Burberry for the visible turnaround, Richemont for best-in-class top-line growth and LVMH as the best macro-driven recovery story,” the analysts, led by Adam Cochrane, said. Last week, Barclays analysts predicted LVMH could suffer a negative impact equivalent to three weeks of lost sales from tourists in the Middle East as the war rages. They predicted a “tough quarter” for the Paris-listed company. The same broadly applies to rivals Cartier owner Richemont and Hermes, Barclays said. European luxury is entering a high-stakes first-quarter reporting period as sentiment has taken a decisive hit, just as many of the sector’s big names were nearing a turning point after years of declining sales. While investors initially hoped for a steady recovery following a mixed Lunar New Year, those hopes have been “firmly upended” by the ongoing conflict in the Middle East and persistent slowdowns in the world’s two largest economies, China and the U.S., Deutsche Bank said. Read more Luxury stocks slump as Middle East conflict risks one of the sector’s ‘few bright spots’ Iran war wipes out $100 billion from luxury stocks Gucci-owner Kering jumps 12% as new CEO maps revival, sales beats estimates Although the Middle East accounts for only about 6% of global luxury sales, it had been one of the few bright spots in an otherwise struggling sector. Many luxury players have seen their business suffer over the past few years, following a boom in demand during Covid-19, which led to price hikes that alienated customers. Paired with weak consumer demand from China — formerly one of the sector’s main growth drivers — the sector has struggled to regain momentum.