In an environment of currency volatility, the luxury sector could prove to be a refuge, especially as global top-end spending appears to be holding up well, according to BCA Research.
Equity investors know that large swings in exchange rates hurt foreign demand and/or pricing of most goods and services. But compared to most sectors, luxury providers are well protected. A luxury product, almost by definition, is supposed to be expensive.
In other words, demand for luxury goods has a very low (or even negative) elasticity to price. Although this sector has already outperformed during the recovery, valuations do not appear excessive. On a forward price-to-earnings basis, the sector trades in line with the broad market.
If, as we expect, sales and earnings growth continue to outstrip the rest of the market, the sector will continue to outperform.
Bottom line: Our European Investment Strategy service maintains a structural overweight relative to European equities.