L'Oreal cut to sell as Deutsche Bank flags China risks

By Jamie Chisholm

Shares of European luxury goods groups fell on Tuesday after L'Oreal was downgraded by Deutsche Bank to sell.

Analysts at the German bank led by Tom Sykes said L'Oreal was "in many ways a unique company...a top-notch marketer, [and] the company is also highly innovative with attractive gross margins and profitability."

However, it is exposed to a slowing China in the medium term and softer demand for the group's dermatological beauty brands, Deutsche added. "The downside risk to the premium multiple that a slower China and dermatological beauty would pose, alongside macro concerns is now considerable, in our view."

Deutsche moved its recommendation from hold to sell, with its price target falling from EUR385 to EUR350. L'Oreal's stock slipped more than 1% to sit just above EUR400, while other French luxury groups, such as Kering , LVMH and Hermes International , nudged lower in sympathy.

The CAC 40 FR:PX1 in Paris subsequently was down 0.1%, though losses were reduced by a positive showing for the banking sector, with Société Générale gaining after announcing on Monday it would team up with Brookfield Asset Management to launch a $10 billion private credit fund.

The DAX DX:DAX in Frankfurt fell 0.3%, but London's FTSE 100 UK:UKX added 0.6%, led by a 7% gain for Associated British Foods after the owner of Primark raised its full-year profit outlook.

"After experiencing two years of growing cost pressures, these negative factors on the business have started to reverse. Think raw material and freight costs which should lead to better gross margins for its Primark retail chain," said Russ Mould, investment director at AJ Bell.

Going in the other direction was Smurfit Kappa , whose stock slid nearly 8% after the London-listed packaging group said it would buy U.S. peer WestRock (WRK) for $11.2 billion.

Staying in the U.K., 10-year gilt yields BX:TMBMKGB-10Y fell 4.3 basis points to 4.432% and the pound dropped 0.4% to $1.2462 after data showed unemployment rose and hiring slowed but wage growth matched a record of 7.8%.

Analysts said the mixed report would make it difficult for the Bank of England when next week it makes its latest monetary policy decision.

"Traders are this month expecting the BoE to hike rates for the 15th consecutive time. While speculation has been building that this month's hike might prove to be the last, this latest wages data shows that upward inflationary pressure is still clear within the economy," said James Harte, analyst at TickMill Group.

"As such, hawkish risks are now rising ahead of the meeting with the latest UK CPI data still to come ahead of the BoE event. Despite this, GBP looks likely to remain pressured near-term as deteriorating UK growth projections weigh on sentiment," Harte added.

-Jamie Chisholm

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

09-12-23 0815ET

Copyright (c) 2023 Dow Jones & Company, Inc.