PARIS — Battered by a global recession, the war in Iraq and the spread of deadly pneumonia, can the luxury sector get any worse?

Hardly, according to Morgan Stanley’s chief luxury analyst, Claire Kent, who predicts "we may be near the low point for luxury goods." In a research note Tuesday, Kent advises investors to "buy on weakness," noting, however, that they need to look through current news events impacting the sector for 12-month investments.

Morgan Stanley maintains its "in-line" view on the luxe sector, meaning stocks are expected to perform in line with the relevant broad market for the next 12 to 18 months. But Kent cut earnings forecasts for all luxury issues for the year, factoring in the impact of war in Iraq and the health scare unleashed by Severe Acute Respiratory Syndrome. Morgan Stanley based its cuts on the war lasting until the end of June and on SARS affecting the sector "significantly" until the end of May.

Kent noted the Asian crisis in 1997 and 1998 proved that a drop in tourism could have disastrous effects, since non-Japan Asia represents about 15 to 20 percent of luxury sales. "But the difference during that period was that all other areas of the world were still performing well," she wrote. "Since the start of the war with Iraq, no region is performing well."

Kent said most sales forecasts remain too high, and most groups — except Richemont — have already done significant cost-cutting, which will impact the bottom line this year.

Morgan Stanley’s favorite "value stocks" are Burberry and Richemont, with Gucci Group considered defensive because of Pinault-Printemps-Redoute’s put option to buy the Gucci shares it doesn’t already own at $101.50 next March.

Kent, the target of a $100 million bias and conflict of interest suit launched by LVMH Moët Hennessy Louis Vuitton, continues to be a proponent of the Gucci story. In Tuesday’s note, she reiterated her confidence in Gucci’s ability to create a great brand in Yves Saint Laurent.

"Within 10 years, YSL could be a $587 million [converted from the euro at current exchange rates] company with EBIT margins in the high teens," she wrote. "In terms of key concerns, the main one is the risk that management takes its eye off the ball at Gucci."On LVMH, set to report first-quarter sales today, Kent praised the resilience of Louis Vuitton, the recent disposal of small brands and the investment focus on star brands. But she questioned management’s ability to create a second strong brand in the fashion and leather goods division.

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