Why Does Louis Vuitton Like a Weaker Euro?

Global Head of Research

In an article published January 31, 2013, Bernard Arnault, the chief executive of LVMH1, was quoted as saying, “The cloud on the horizon … is the evolution of currencies, [and a strong euro] would have an impact on French exporters and for our group …”2 These were prescient remarks. On this date the euro was at about $1.36, and it was in a general strengthening trend through about the first half of 2014—not helpful for European multinationals looking for their exports to be competitive3. End of 2014 Offers a New Outlook In opening the annual results presentation for 2014 on February 3, 2015, Mr. Arnault hinted at a new environment, saying:   There was a change during the year. And in the second half, the euro managed to decline, which hadn’t happened for a number of years, and this made our products more competitive, and for French exporters in general, it was very buoyant. Furthermore, the economy at the end of the year was somewhat boosted by two factors: the drop in the price of oil and more recently by the injection of liquidity into the European economy.4   Mapping the Inflection Point—4Q14 In looking at how the revenue picture at LVMH evolved in 2014, it’s clear that the weakening of the euro in the second half of the year had a material impact. LVMH's Quarterly Evolution of 2014 Revenue (as of 12/31/2014) First Half of 2014—Euro Strength: On December 31, 2013, the euro was at about $1.37. While it certainly fluctuated—hitting about $1.39 in early May 2014—it was still at about $1.37 on June 30, 2014.5 As can be seen, this had a negative impact on LVMH’s revenue.   • Second Half of 2014—Euro Weakness: By September 30, 2014, the euro hit about $1.26, and it ended 2014 at $1.21.6 Because of the euro’s decline, there was no currency impact on LVMH’s third-quarter revenues and a +2% currency impact on its fourth-quarter revenues. While the cumulative currency impact on LVMH’s revenue of more than 30 billion euros was -2%,7 this is very different from the -5% impact seen in the first quarter of 2014. It’s also worth noting that on February 3, 2015—the day these results were made public—the euro was at $1.15,8 and with Mario Draghi’s blockbuster plan for quantitative easing, it’s tough to make a case for significant euro strengthening going forward. Weaker Euro Not Only Tailwind for LVMH While we’re particularly interested in LVMH’s example as a firm helped by a weakening euro, Mr. Arnault’s mention of the oil price decline is also worth noting. In a speech, Bill Dudley, the president of the New York Federal Reserve Bank, said that a $20-per-barrel decline in global oil prices results in an income transfer of about $670 billion per year from oil producers to oil consumers.9 Put another way, if the decline in Brent oil from its approximately $115 high in 2014 (June 19, 2014) to its level of about $55 on February 3, 2015—a drop of $60 per barrel—persisted for one year, oil consumers would have an additional $2 trillion or so that they didn’t need to spend on oil.10 Maybe some of that admittedly hypothetical amount would be spent on the aspirational luxury goods of LVMH.         1As of 12/31/14, LVMH was the 12th largest holding in the WisdomTree Europe Hedged Equity Index at 2.8%. 2Nadya Masidlover, “LVMH Optimistic About 2013, Except for Euro,” The Wall Street Journal, 1/31/13. 3Refers to the euro reaching a level of $1.39 on 5/6/14, the recent peak of its appreciation against the U.S. dollar. 4LVMH Q4 2014 Earnings Call, Bloomberg transcript, 2/3/15. 5Source: Bloomberg, with levels of the euro as of specified dates. 6Source: Bloomberg, with levels of the euro as of specified dates. 7Source: 2014 Annual Results, LVMH Moet Hennessy Louis Vuitton, 2/3/15. 8Source: Bloomberg, with level of the euro as of specified date. 9Source: William C. Dudley, “The 2015 Economic Outlook and the Implications for Monetary Policy,” Federal Reserve Bank of New York, 12/1/14. 10Levels of oil prices refer specifically to Brent oil with Bloomberg as source for specified dates. The $2 trillion comes from multiplying Dudley’s income transfer statement of $670 billion per year by three to coincide with the $60 drop in the price of Brent oil ($20 times three). The statement is hypothetical in nature and meant for illustrative purposes.

Important Risks Related to this Article

Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. Investments focused in Europe are increasing the impact of events and developments associated with the region, which can adversely affect performance.

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About the Contributor
Global Head of Research

Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. In January of 2014, he was promoted to Associate Director of Research where he was responsible to lead different groups of analysts and strategists within the broader Research team at WisdomTree. In February of 2018, Christopher was promoted to Head of Research, Europe, where he was based out of WisdomTree’s London office and was responsible for the full WisdomTree research effort within the European market, as well as supporting the UCITs platform globally. In November 2021, Christopher was promoted to Global Head of Research, now responsible for numerous communications on investment strategy globally, particularly in the thematic equity space. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant. He received his MBA in Quantitative Finance, Accounting, and Economics from NYU’s Stern School of Business in 2010, and he received his bachelor’s degree from Colgate University in Economics in 2006. Christopher is a holder of the Chartered Financial Analyst Designation.