PARIS — Adding a skeptical voice to rumblings of a near- to midterm luxury rebound, Morgan Stanley has lowered its view on the sector to “cautious” from “in-line,” warning that stock values are looking “excessive” with limited upside potential. Additionally, the dollar-euro exchange rate that is forecast for next year could hurt sales growth for European luxury goods by as much as 6 percent.
“Most companies will see no better than high single-digit sales growth for the next three years with limited room for EBIT margin potential,” Claire Kent, the investment firm’s chief luxury analyst, wrote in a research note titled “There’s no value here.” “We believe the rapid growth in the luxury industry in the late Nineties was driven by wealth creation, which is unlikely to occur again in the near future. In addition, the industry is much more competitive and saturated, given the aggressive floor-space expansion among the major brands and new entrants.”
“Cautious” is Morgan Stanley’s lowest industry rating. “In-line” means a sector is likely to perform at par with broad market benchmarks over 12 to 18 months.
Besides what she described as inflated valuations, Kent justified the downgrade because the luxury sector tends to underperform ahead of interest rate hikes, which are expected in early 2004, and because of the continuing negative impact of a weak dollar against the euro.
On the latter point, she explained that American consumers are unlikely to tolerate further price increases for European luxury goods before turning to domestic brands like Coach, Polo Ralph Lauren or Tiffany.
While projections for dollar-euro exchange could dent growth for European luxury goods in the U.S. of up to 6 percent, the main positive for the luxury sector is a strengthening yen against the dollar, which should fuel Japanese tourism and luxury spending, Kent wrote. As for China as an emerging growth market, she pegged its benefits as still being five to 10 years down the road.
Kent’s top stock picks for the sector, rated “overweight” and expected to exceed average returns in the industry over 12 to 18 months, are Burberry and Richemont.
HSBC in Paris, which maintains a “neutral” stance on the luxury industry, also has a cautious short-term view, despite the fact that sector drivers continue to improve.In a research note, analyst Antoine Belge notes that luxury firms are unlikely to be bullish on the coming holiday season, and stocks are unlikely to continue to outperform as they have since July.
“We have thus become more cautious as luxury stocks will not find it easy to outperform further from these levels,” Belge wrote. He also cited a surging euro as a negative factor, along with a poor outlook for watches and sluggish sales trends in Europe.
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