Is the beauty sector still attractive?
While beauty, cosmetics and skincare firms bet big on China, a tougher market threatens their premium valuations
Beauty has been a popular sector among investors who like high-quality companies. These brands were seen as relatively defensive: even in a recession, customers were likely to keep buying their favourite products as an affordable luxury. And there was good potential for growth since customers in emerging markets would buy more cosmetics and high-end skincare from desirable foreign brands as they became wealthier. So a slump last week in the shares of Japan’s Shiseido and South Korea’s Amorepacific is worth noting.
Shiseido is off almost 24% after disappointing results that showed continued weak demand in China. As a one-off, this might not be a complete shock: the company had also reported weak full-year results for 2023 driven by China and had already announced plans to cut costs and improve profitability. Its shares peaked in 2019 and have been looking weak since mid-2023. However, Amorepacific fell a similar amount after earnings missed expectations, with continued weak demand in China. Looking back further, US group Estée Lauder had a dire 2023 on the back of problems… yes, China. So all this is starting to look like a bit of a worrying pattern.
Is investing in the beauty sector worth it?
It seems clear that the market that once offered the greatest promise for global beauty – and provided much of the justification for why these firms should trade on elevated valuations – is becoming very challenging. There are two likely factors. First, underlying growth and consumer demand in China continue to be weak. Second, consumers may be turning more towards local brands for reasons that range from value for money to nationalism or domestic pride.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Shiseido says that controversy over the release of treated water from the Fukushima nuclear power plant is affecting demand for Japanese products (misinformation about this is widespread in China). Such risks are not new. When South Korea agreed in 2016 to allow a US missile defence system to be deployed in the country, there were government-backed campaigns to boycott South Korean products. Amorepacific’s share price has never regained the bubbly peak it hit back then and, like, Shiseido has been on a wobbly downtrend for a while.
Earnings forecasts for the beauty sector imply a decent rebound even for the underperformers in 2025. Yet in China, competition from local brands is likely to get tougher. Rules that will force cosmetics firms to disclose the precise composition of their products to regulators have raised concerns about whether this could mean trade secrets get leaked. And the China risks put a lot of weight on the US and Europe to be steady and other emerging markets to show growth. Most firms now trade on price/earnings ratios in the 20-25 range based on estimates for 2025. There are some excellent stocks in this sector: I still hold L’Oréal in my multinationals portfolio, alongside diversified groups such as Procter & Gamble and Unilever. But as with other consumer stories that have recently disappointed, there is a risk that valuations come down across the board.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.
Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.
He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.
-
Fund flows flip positive in November
Data from the Investment Association shows that two months of negative fund flows were reversed during the month of November as index trackers remain strong
By Dan McEvoy Published
-
The prime London property hotspots for homebuyer demand
We look at the areas in London which saw the largest increase in quarterly demand in the prime property market
By Marc Shoffman Published
-
Why Wise could be worth a lot more than its share price implies
Foreign-exchange transfer service Wise has the potential to become the Amazon of its sector – here's why you should consider buying this stock now
By Jamie Ward Published
-
How to find the best investment ideas that others will miss
Find the best investment ideas by observing trends and listening to anecdotes, says Max King
By Max King Published
-
Can The Gym Group pump up your portfolio?
Gym Group was one of the best UK small-cap stocks in 2024 and will beef up your profits this New Year
By Rupert Hargreaves Published
-
MoneyWeek's five predictions for investors in 2025
MoneyWeek's City columnist gazes into his crystal ball and sees five unexpected events in store for investors in 2025
By Matthew Lynn Published
-
How buy-and-build stocks deliver strong returns
Bunzl, DCC and Diploma became successful through buy-and-build – rolling up dozens of unglamorous businesses. How does it work and what makes it successful?
By Jamie Ward Published
-
Singapore Technologies Engineering shows strong growth
Singapore Technologies Engineering offers diversification, improving profitability and income
By Dr Mike Tubbs Published
-
Has RIT Capital fallen out of favour?
RIT Capital saw its discount soar amid weak returns, and investors remain sceptical of a turnaround
By Max King Published
-
Why emerging markets are waiting for a weak dollar
Emerging markets have had a better year but, like everything else, are still lagging far behind the US
By Cris Sholto Heaton Published