According to a research paper issued by BofA, the luxury sector is in a transition phase, i.e. “The recent pullback in luxury stocks constitutes a buying opportunity. “Historically, pullbacks in the sector have been buying opportunities and this time will likely be no different”
Here is the context:
Stocks in the luxury sector are down from their recent highs as evidence points to increasing demand normalization. Some $180 billion has already been wiped out since a recent peak in April, leaving gains for the year hanging by a thread.
However, companies in the sector are likely to continue to beat earnings expectations and see their profit estimates upgraded amid buoyant demand. A number of factors point to the structural appeal of the sector, i.e. a growing number of mid-class people aspire for recognition through key products. Brand desirability, high barriers to entry, and best-in-class management allow providers of luxury products decent margins and an excellent pricing power opportunity.
The Market’s Expectations
Compared to the global European market, luxury stocks have erased their excess outperformance.
Moreover, analyst share-price projections still reflect a bright future for the stocks. Their aggregate price targets imply a 25% gain for LVMH over the next year, a 31% increase for Kering, a 39% advance for Richemont and a 15% advance for Hermes. By their estimates, the MSCI’s index for the sector offers a potential return of more than 12%. “The stocks performed well this year, so it makes sense to take some profits,” Palatine Asset Management’s Vacossin said. “But I think it’s more a tactical move rather than a broad change in trend.”