Stay Overweight Luxury Stocks Editor: In a recessionary environment/ post-bubble contraction, the market sectors that perform well tend to be those that provide consumer staples, i.e. things that people cannot go without, or luxury goods. The uber-wealthy are, for the most part, unaffected by economic downturns, and therefore companies that make and sell high-end goods and services tend to continue to perform well, and this seems to be the case right now.

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.

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.

The bottom line

Our European Investment Strategy service maintains a structural overweight relative to European equities.

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