The Paris Stock Exchange is trading higher than it has been in two decades. The three heaviest stocks are now luxury stocks for the first time. The analysts are nevertheless divided: high phases often take breaks.
Dhe tired of the pandemic, investors prefer to console themselves with the fine and noble. This is how you could interpret the changing of the guard that took place on the Paris stock exchange last week: The third most important figure is no longer the pharmaceutical manufacturer Sanofi, which is working on a vaccine against Covid-19, but Hermès, the small but fine luxury goods manufacturer with just one 14,000 employees. From an investor’s point of view, the company with the legendary Jane Birkin and Kelly handbag models is now worth 111 billion euros. The conquest of luxury manufacturers has received new momentum with the latest quarterly results.
Thanks to good sales in Asia and North America, they have largely left the crisis behind them. Internet business is also becoming more and more smooth, after manufacturers had previously held on to the physical shopping experiences in their brand temples for a long time. Quite a few customers are tempted to replace the expenses for a trip abroad with the purchase of a premium product. The three heaviest stocks on the Paris stock exchange are now luxury stocks for the first time: ahead of Hermès are LVMH, number one in France and Europe with a market value of 321 billion euros, followed by the L’Oréal group, which not only sells luxury brands, but has a market capitalization benefited from this wave of 192 billion euros. Even the manufacturer Kering, which with its multi-brand strategy from Gucci to Saint Laurent is similar to its arch-rival LVMH, comes in at 82 billion euros and is sixth behind the three luxury front-runners as well as Sanofi and Total.
The comparability is limited
But quite a few shareholders no longer want to trust the shine and glitter. The valuations of the companies have reached new highs on many stock exchanges if one looks at the period since the bursting of the Internet bubble a good two decades ago. This also applies to the French leading index CAC40 at the current level of around 6350 points. The younger participants in the stock exchange business were not yet working when the index almost exceeded the 7000 point mark in September 2000. In contrast to other exchanges such as the one in Frankfurt, the CAC40 has not yet surpassed the high of that euphoric time. Comparability is limited because the CAC40, unlike the Dax, does not include reinvested dividend payments. But in Paris, too, all eyes are now on the historic record at the beginning of the millennium. The index exceeded the interim high of July 2007 at 6168 points three weeks ago.
The analyzes are split between warnings of a bubble and rather reassuring indications that high phases in the stock market often take breaks. With so much central bank money in circulation that has to go somewhere, some people lose their bearings. “You don’t even know how to determine the fundamental value of an asset,” complains the economist Patrick Artus of the French investment bank Natixis. He does not trust luxury stocks because they are now linked to monetary policy and not to their earnings development. Another warning sign among the skeptical analysts is the run on the Spacs, the Special Purpose Acquisition Companies, which, like a blank check, collect investors’ money in order to use it for later takeovers and IPOs.
Massive share buybacks
In the camp of optimism, however, one emphasizes how the sales of luxury companies in Asia are increasing again: In the first quarter of 2021 about plus 94 percent compared to the same period of the previous year for Hermès, plus 86 percent for LVMH and plus 83 percent for Kering. Beyond the pure industry analysis, it should also be noted that the pandemic is at least stabilizing in many of the world’s major economies, even if emerging countries such as India and Brazil cannot be included. Because the vaccination campaigns are progressing. As long as the results of the companies are pointing upwards, the stock market should follow this calmly, it is said. Massive share buybacks also contribute to optimism: The companies have soaked themselves with liquidity and now want to let investors participate.
The nice side effect is that these operations automatically increase earnings per share as the number of shares dwindles. Carrefour, Atos, Vinci, Arcelor Mittal and Legrand have announced extensive buyback programs. Carrefour speaks of 500 million euros, L’Oréal of up to 1.2 billion euros. LVMH has obtained approval from the general meeting to buy back shares at a price of up to EUR 950 per share. The current rate is around 637 euros. That could lead to a transaction of up to 50 billion euros. But that is only a theoretical value. LVMH has such approvals given every year in order to be able to remain flexible.
Against this background, most investors switched to wait and see at the beginning of the week. They look ahead to the next meeting of the US Federal Reserve on Wednesday. In addition, companies such as Total, Sanofi, Airbus and Dassault will present new business figures this week.