Revisiting our 23 Jan trade Idea Long Louis Vuitton Mar 24 740 Calls financed by a Mar 24 600 Put, LVMH has been one of the top 3 performers in the SX5E since the broader index rebound from the bottom of 17 Jan, posting a 33% return vs. 14% for the SX5E. Our rationale for entering calls at that time was our expectation of a broader market rebound based on news that China was considering a USD278 billion rescue package, and that Luxury Goods was one of the sectors that would benefit since it had underperformed significantly due to its exposure to the weakening Chinese market running up the announcement.
LVMH is currently trading very close to its ATH seen in early 2023 (4% disc), at an RSI of 72 and a slight premium (3%) to its long-term PE. The news of China stimulus benefited the stock, leading to a run up close to its all-time high. We now see more risks to the downside following the delay of stimulus, which we believe has been fully priced in to the share price. The company is also set to report its Q1 2024 Sales results in April, and a potentially weaker print could be a catalyst for a move downwards.
The PBOC withdrew a net 94bn yuan (USD13bn) from the banking system on Friday (15 Mar) , the first such withdrawal since November 2022, signalling a cautious monetary policy stance to support the yuan and manage liquidity. This move may frustrate expectations for more aggressive stimulus to achieve China's 5% growth target, underscoring the limited room for monetary easing given the interest rate differential between the US and China. The ongoing delay in the long-anticipated stimulus from China poses downside risks to the broader market, and cyclicals specifically, which appear to be pricing in a blue-sky scenario for the rest of 2024. Cyclicals continue to trade at stretched valuation levels, especially against defensives, with indications that the market may have overly priced in positive news about recovery, limiting the upside for the remainder of the year.
With volatility still at undemanding levels (3M ATM IV 2YPc38), we suggest buying June 24 800 Puts with a net cost of 2% of underlying (forward spot ref: 872). Should the spot price decrease by 10% to c.780, the value of the put alone would return 4.8x on the premium employed.