LVMH, a big stockfish in the small European pond

LVMH, a big stockfish in the small European pond

The market capitalization of the world’s leading luxury goods company LVMH surpassed the €400 billion mark on Tuesday, a first for a European company but still unable to match the American giants.

The milestone of 400 billion euros (LVMH is worth 430 billion dollars) is symbolic, but represents an all the more impressive record for a European company as the luxury group is the only company from the old continent among the 20 most global large caps.

A company’s capitalization is the amount that would have to be spent to buy all the shares in the company.

According to a survey conducted by the company EY at the end of December 2022, 61 of the top 100 ratings are Americans. France, Switzerland and the United Kingdom are represented by 12 companies in this list. The company does not belong to any German company, since the chemical group Linde announced in October that it wanted to leave the Dax (the most important German stock index) in order to be listed only in the United States.

Only 15 companies from China, the world’s second largest economy, make this ranking, a low number due to investors’ lack of confidence in Chinese assets, which are particularly vulnerable to government intervention.

In addition to the Swiss agri-food giant Nestlé, from which LVMH took over the position of largest European capitalization in the second half of 2022, several companies in the healthcare sector occupy the top of the European basket: Novo Nordisk, Roche, AstraZeneca, Novartis . Some still benefit from a “Covid effect”.

In its study, EY notes that “Europe’s importance in global stock markets has been declining for years”, pointing out that before the 2008 financial crisis “46 of the 100 most valuable companies in the world were European, now there are only fifteen”.

European companies pale in comparison to the American giants Apple ($2,120 billion), Microsoft ($1,750 billion), Google’s parent company, Alphabet ($1,190 billion) and Amazon ($970 billion).

A valuation gap largely explained by the size of the companies: LVMH had sales of €64 billion in 2021, while Apple’s sales for its staggered 2021 fiscal year were heading towards $400 billion. /2022.

The attractiveness of Wall Street, where “the full spectrum of international investors is accessible,” also plays a role, according to Christopher Dembik, director of macroeconomic research at Saxo Bank. “There are more streams aimed at the American market.”

An observation not entirely shared by Simplify Asset Management’s Michael Green, who emphasizes that “markets are now broadly global” and that, proportionally to income, “valuation differentials between Europe and the United States have widened diminished and have disappeared”.

Michael Hewson, an analyst at CMC Markets, also needs to consider the frequency and larger volume of stock buyback programs in the US, which support stock prices.

“There is also a phenomenon of imitation by asset managers who systematically have quite a large exposure to the American market,” the proportion of American assets in a portfolio “can rise to 30% to 50%, even among European managers,” he assures Christoph Dembik.

For him, the luxury sector is the only European sector that can claim to be catching up with American capitalization, with “resilience regardless of the type of crisis” and “phenomenal stock market rises over the last decade”.

Since 2020, LVMH stock has been driven by government and central bank measures to support the economy, increasing its sales despite rising prices, and more recently China’s economic reopening.

Its price reached 803.20 euros in Tuesday’s session, a record to end at 797.40 euros. This represents an increase of almost 50% from the lowest level in 2022, which was reached in early June. Since the beginning of 2023, it has already risen by 17.28%.

For Luca Solca, luxury analyst at Bernstein, “LVMH’s progress shows that luxury is one of the few sectors where Europe is a leader”. And “LVMH is increasingly the king of the jungle,” he adds.