The CAC 40 index is being dragged by luxury group companies, which helped to power it to a record high in 2023. The index has remained in a fairly tight range this year and is down by 2.60% from its highest point in December. In contrast, the German DAX and Italy’s FTSE MIB have jumped to a record high.
Luxury brands are strugglingA closer look at the CAC 40 index companies shows that the current price action is being caused by luxury group companies that are not doing well. Kering, the parent company of Gucci, has dropped by more than 8.58% this year and by 33% in the past 12 months.
LVMH shares have retreated by 6.8% this year and by 14% in the past 12 months. Some analysts believe that the company constantly receives a conglomerate discount, which explains why it has lower valuation multiples compared to Hermes. LVMH owns over 70 companies.
Meanwhile, Hermes shares are down by over 4% this year. Other companies like Pernod Rickard, L’Oreal, and EssilorLuxxotica that have luxury segments have also retreated this year. Pernod is the worst-performing CAC 40 index this year.
The most likely reason for this price action is that China is not doing well, as evidenced by its stock market. As I wrote on Wednesday, key indices like the Hang Seng, Shanghai Composite, and China A50 have all plunged by double-digits. This plunge happened even as Indian and Japanese stocks surged to a record high.
China is an important part of luxury brand companies. For example, LVMH generates 30% of its revenue in its rest of Asia segment, where China is the biggest part. The same is true for companies like Hermes and Kering, which are benefiting from a growing middle class in China.
China’s $6 trillion wipeoutThe ongoing plunge in Chinese stocks has wiped over $6 trillion of value in the past few months. This is an important thing for luxury brand companies. For one, the crash of these stocks is leading to weaker consumer and investor confidence. Low confidence leads to lower spending on discretionary products.
Further complicating the issue is that the price of cryptocurrencies has retreated in the past few days. Bitcoin has dropped from $49,000 to below $39,000 while the market cap of all digital coins has retreated to $1.56 trillion.
Luxury groups tend to benefit from the robust crypto industry because many ‘new money’ individuals prefer to buy these items. On the positive side, some analysts believe that cryptocurrencies will bounce back after this shakeout ends.
Top CAC 40 companiesThe ongoing retreat of luxury group companies is being offset by a rebound in some companies. Teleperformance, a company that provides IT consulting services, has jumped by 16% this year as demand for AI jumped. The same is true with Capgemini whose stock is up by over 7.97%. Capgemini, like other firms like Wipro and Infosys, are seeing robust growth.
Other top-performing companies in the CAC 40 index are Orange, Safran, Dassault, Publicis, and Airbus. Safran and Dassault are defense contractors that are seeing more orders as geopolitical risks rise. This is in line with what I wrote earlier today on Germany’s Rheinmetall.
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