Hits and misses: armaments boom as luxury loses style

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Guns and glamour represent two of the sectors that Lex expected to surge this year. We were right on one count. Defence companies such as Rheinmetall of Germany continued to benefit from global conflict and rearmament. But luxury behemoth LVMH stalled as the Chinese economy slowed. 

Russia’s brutal invasion of Ukraine in early 2022 reversed a multi-decade lull in western defence spending. Shares in Rheinmetall more than doubled during 2022. They have jumped a further 50 per cent since the start of 2023. 

Luxury spending has proved less durable. The sector was expected to benefit from China’s post-Covid reopening. But the rebound was weak and rapidly overshadowed by China’s property slump.

The factors that drove both stocks in 2023 are unlikely to change in 2024.

Rheinmetall upgraded its midterm guidance in November. There are few signs of peace in Ukraine. The awful war between Israel and Hamas in Gaza has created the possibility of a broader conflict in the Middle East.

Demand for artillery shells will remain strong, as will orders for new tanks and fighter jets. The company now expects revenues to be as high as €14bn by 2026 — a tenth more than analysts had forecast.

The company trades at a 14 times price to forward earnings valuation that is only slightly above its 10-year average. Lex believes this will rise.

Spending on luxury, however, has weakened as deleveraging takes precedence over consumption.

Interest rates are affecting the lifestyles of the rich and famous. Years of high luxury sales are slowing down. Much of that can be pinned on trouble in key growth region China. Shares in LVMH fell more than one-fifth from a record high in the summer, before clawing back losses to end around a tenth up since New Year.

The upside for shareholders in 2024 could be a spree of acquisitions that supplement organic growth. LVMH has a clean balance sheet and potential firepower of €90bn, thinks UBS.

Customers may be reluctant to open their wallets. LVMH may just have to do some spending of its own.