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SELL ANY BEAR MARKET RALLY IN LUXURY NAMES - BERENBERG

A potential end to the Middle East conflict would be positive for sentiment towards luxury stocks. But while geopolitics may help sentiment at the margin, investors face a tougher reality: weak underlying fundamentals, Berenberg equity analysts say.

First-quarter trends were broadly unchanged from recent quarters, with sector sales up about 3% year-on-year despite easy comparisons. The U.S. remains resilient, Europe is soft and Asia's improvement largely reflects base effects.

"Management teams were quick to highlight the impact of the Middle East conflict...providing the market an excuse to cut FY26 consensus revenue growth expectations for the sector by 0.9ppt (to +1.6% yoy)" write the analysts.

Strip that out and demand still looks fragile. Chinese consumers remain constrained by high debt levels and falling property prices, while aspirational consumers globally are squeezed by inflation, higher housing costs and job insecurity.

All of that leads Berenberg to think consensus modelling of 6%-7% sector revenue growth per year in six months time' is "unrealistic".

Downgrades driven by the Middle East conflict in Q1 "mask the reality" they say.

The luxury sector though is due a rally - if its pattern of three bear market rallies since 2023 is anything to go by. All three were similar in size and lasted about 9 weeks.

"We would be sellers of any rally," conclude the analysts.

(Lucy Raitano)

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