Luxury stocks under pressure after Nomura downgrade

Luxury stocks in Europe were under the cosh on Tuesday after Nomura said expectations for 2016 may be too high and there is a risk of a sector de-rating.

The Japanese bank said it was cautious on the European luxury sector in the short term given an uncertain macroeconomic environment, volatile forex and weaker Chinese consumer sentiment owing to the country’s volatile stock market.

In the longer term, however, Nomura has confidence in underlying demand from China for luxury goods and said its research suggests rising disposable incomes, a reduced income gap, and increased spending on discretionary items in China all support increased luxury spending.

It pointed out that European luxury sales have been supported by a weaker euro and easing visa requirements, leading to the arrival of more tourists who are spending.

However, these are all external factors, and not down to the strength of the underlying European economy, which is still mixed, with a reversal of currency trends or political instability likely to affect tourist flows and in turn European luxury sales.

In addition, Nomura said the recent terrorist attacks on Paris have raised concerns over safety not only in France but also in many large European cities.

“This will probably dampen tourists’ short-term enthusiasm to travel to Europe. We will continue to monitor tourist data to Europe, especially Chinese, as an indicator of future growth.”

The bank’s key buys are LVMH and Kering.

It downgraded Burberry to ‘neutral’ from ‘buy’ and cut the price target to 1,500p from 1,700p. The bank cut Hugo Boss to ‘reduce’ from ‘neutral’, lowering the price target to €95 from €120 and downgraded Tod’s to ‘reduce’ from ‘neutral’, trimming the target to 76p from 80p.

Finally, it downgraded Swatch to ‘neutral’ from ‘buy’ and slashed the price target to CHF410 from CHF460.