French stocks enjoy renaissance on back of Chinese demand for luxury

France’s stock market has surged to a series of record highs as investors pile into luxury goods groups on hopes of a sustained rebound in Chinese demand for high-end brands.

The Cac 40 has risen 16 per cent so far this year and by more than 30 per cent since a low at the end of September, outperforming Europe’s region-wide Stoxx 600 and the US S&P 500 over the same period.

Shares in Cac-listed cyclical stocks including chipmaker STMicroelectronics, carmaker Stellantis and oil and gas group TotalEnergies have all climbed sharply in recent months. Yet roughly one-third of the market’s rally since the start of the fourth quarter last year stems from burgeoning investor interest in Hermès, Kering, LVMH and L’Oréal.

Shares in the four companies have risen 61 per cent, 25 per cent, 45 per cent and 28 per cent respectively since then, with LVMH and Hermès hitting record highs. Beijing’s abrupt dismantling of its zero-Covid restrictions late last year accounts for much of the wider luxury goods sector’s recent success, according to analysts.

China is “the most important market” for European luxury names, according to Morgan Stanley, with about two-thirds of Chinese consumers’ personal spending on expensive accessories taking place abroad before the pandemic began. Prices for luxury goods can be up to 30 per cent lower in Europe than in China, the bank said.

“Luxury stocks tick many boxes at the moment”, said Emmanuel Cau, head of European equity strategy at Barclays. “Some global investors likely find indirect exposure to China via European stocks, and luxury in particular, easier, more liquid and less risky than direct investment in Chinese shares”. 

LVMH last week reported a 17 per cent increase in global sales for the first quarter of 2023, with Asia-wide sales up 14 per cent on the back of China’s economic reopening.

Hermès said it enjoyed an “exceptional” 2022 in spite of China’s Covid restrictions, and “driven by a very good Chinese new year” reported a further 23 per cent increase in revenue from across Asia for the first three months of 2023.

The return of Chinese consumer demand is not the only factor helping luxury goods groups, and with them the Cac, outperform its peers.

On top of their solid balance sheets and profit margins, “which is what investors are seeking at the moment”, luxury goods groups can usually pass on higher prices to consumers without losing market share, Cau said. This means they are widely viewed as a hedge against inflation.

Even so, a recession later in the year could derail their progress. “The question is whether [luxury goods] are immune to a consumer downturn,” Cau added. “We don’t think so, and they typically performed poorly in past recessions. But we are not quite there yet, so more of a grind higher seems likely.”