With consumers ready to splurge after almost 18 months of restrictions and high prices commanded for products, the European luxury sector is set for a boom. However, investors are concerned about declining valuations of luxury companies, says Martyn Hole, Equity Investment Director, Capital Group. The MSCI Europe Index for apparel and luxury goods rose 20 per cent this year. As per Business of Fashion, the index outperformed MSCI Europe’s previous gain of 12 per cent and given it a PE ratio 35 times estimated 2021 earnings.

The surge also increased the sector’s valuation premium relative to the broader market to a historic high of above 100 percent. Analysts at Barclays Plc affirm, luxury stocks are now placed in the very-expensive category and have little room for improvement in the second quarter. Italian luxury fashion retailer Golden Goose sold a €480 million ($588 million) six-year junk bond this month as investors betted on its ability to sell high-end sneakers for around €400.

Fiscal stimulus, consumer savings drive luxury growth

The European luxury sector is being driven by the stimulus checks in the US, the growing popularity of casual-wear and savings of around €700 billion owing to pandemic-induced lockdowns. As Michel Keusch, Portfolio Manager, Believue Asset Management AG explains, people are waiting to treat themselves and buy things that will make them look good. Yet, the sector may not benefit from the stimulus and reopening of economies as consumers will have a wide range of spending options, ranging from travel and restaurants to theatres and cinemas.

Pandemic to give rise to new growth engines

The over emphasis on mergers and acquisitions and skepticism over demand from China may also put a brake to luxury’s growth engine. Recently, M&A rumors sent German apparel maker Hugo Boss’s stock up 43 times its 2021 earnings while the stocks of troubled Italian shoemaker Tod’s SpA’s soared 66 per cent over speculations of being acquired by LVMH.

Over the next 12 months, the MSCI Europe Luxury Goods Index is unlikely to grow over 19 per cent on the MSCI Europe Retail Index, particularly online retailers like Zalando SE. Yet, newer growth engines, like China’s shopping hotspot of Hainan are likely to emerge, says Sanford C. Bernstein, Analyst, Luca Solca. Overall, the sector’s prospects appear very bright, adds Hole.