Morgan Stanley says luxury industry heading for downturn

European luxury stocks fell again on Tuesday as Morgan Stanley joined the chorus of analysts warning that demand for expensive handbags and jewelry in China and Europe is likely to slow.

Shares in French luxury giant LVMH fell as much as 2.3%, extending their drop from the year’s high to about 22%. Cartier owner Richemont dropped as much as 3.3% while Gucci parent Kering and Burberry Group Plc were also lower.

Morgan Stanley analysts led by Edouard Aubin lowered their organic growth forecasts for most luxury companies for the second half of the year, and also trimmed their 2024 profit forecasts, saying that their checks indicate that demand in China softened over the summer and Europe was also weaker.

While recent share-price declines have left the luxury sector approaching so-called value territory, Aubin said it isn’t time to buy the dip. “We expect a weak exit rate to the quarter to intensify the debate around demand normalization,” he wrote.

Morgan Stanley’s comments echo other analysts who have been bearish on the sector recently. Earlier this month, Barclays analyst Carole Madjo reduced her recommendation on LVMH and the firm lowered its view on the sector to neutral from positive. Deutsche Bank’s European equity strategists also downgraded the consumer products sector because of luxury companies’ exposure to China, while analysts at Jefferies and Goldman Sachs Group Inc. see choppy times ahead.

Morgan Stanley’s Aubin downgraded Richemont to equal-weight from overweight today and upgraded Prada to overweight from equal-weight. The analyst lowered his price targets for LVMH, Kering, Moncler SpA and several other luxury stocks.