UBS(US:UBS) Hua Er Jie Jian Wen·2025-07-03 10:06Core Viewpoint - UBS has upgraded the luxury goods sector rating from underweight to benchmark allocation based on tactical and structural considerations, indicating a potential bottoming out of the sector after significant declines [1][2]. Group 1: Market Performance and Projections - UBS reports that the luxury goods sector has reached an extreme oversold condition, with a 100% probability of outperforming the market over the next six months [2][4]. - The sector is currently at a near three standard deviation oversold state, a rare occurrence historically [3]. - The expected earnings revisions for the luxury sector are less severe than the overall market, suggesting that stock prices have already reflected more pessimistic expectations than warranted [6]. Group 2: Valuation and Structural Support - The luxury goods sector's 12-month forward P/E ratio premium relative to the market is currently at 80%, which, while above the historical average of 63%, is only slightly higher than normal levels [7]. - The valuation metrics have returned to levels seen a decade ago, with major European luxury companies' earnings per share only 9% above trend lines, compared to peaks of 50% above [7]. - The U.S. market provides structural support for luxury goods, accounting for approximately 21% of the luxury market and nearly 33% of its growth, driven by factors such as stock market wealth effects and excess savings among high-income households [9][11]. Group 3: Long-term Structural Advantages - The luxury goods industry possesses unique structural advantages, including high brand value, long brand lifespans, and the appreciation of high-end luxury goods, alongside growth in the middle class in emerging markets [11]. - For instance, in India, the highest income quintile is expected to grow at a compound annual growth rate of 15% from 2024 to 2030, significantly outpacing the overall population growth rate of 1.3% [11].