European Luxury Stocks: Significant Selloff a Buying Opportunity

We are maintaining our fair value estimates for stocks in our luxury coverage following the announcement of reciprocal tariffs by US President Donald Trump. Tariffs of 20% on the European Union, 10% on the UK, and 31% on imports from Switzerland are having the most impact on our coverage (as well as 36% tariffs on Thailand for Pandora, where most of its manufacturing takes place). Americans account for around 30% of global luxury consumption and sales exposures in the Americas for companies under our coverage range from the midteens to high 30s. Moncler, Prada, and Swatch are least exposed; EssilorLuxottica, Brunello Cucinelli, and Pandora are most exposed.

We continue to believe that the luxury industry can offset tariffs with pricing and luxury consumers are globally mobile (for example, about 35% of global luxury purchases are done by tourists) hence, share of shopping abroad is likely to increase for Americans.

We see higher risk from the impact of tariffs on the broader economy and consumer sentiment. A downturn in US equity markets since the beginning of the year is not a good indicator. We found that equity prices had significant predictive power for luxury sales before the pandemic; 59% lagged correlating with luxury industry growth on S&P 500 returns over 2007-19. Despite being economically cyclical, the luxury sector remains resilient in the long run with strong pricing power, low risk of technical obsolescence, and high barriers to entry. We see any significant selloff in the sector as a buying opportunity.