BofA Upgrades European Luxury Sector to Overweight on China Stimulus Hopes

BofA Securities has upgraded its rating on the European luxury goods sector to "Overweight," anticipating that a significant policy stimulus from China could revive the sector's fortunes. The bank's analysts believe Beijing will be forced to act in response to a sharp economic slowdown, creating a catalyst for companies with heavy exposure to the region.

The Case for Luxury

BofA lifted its recommendation from a previous "Marketweight" rating, pointing to the sector's 50% relative decline since 2023. Analysts at the firm noted that the sector's price relative has started to rebound from a nine-year low and that its macro projections suggest a potential for 15% further outperformance in the coming months.

The upgrade is heavily predicated on the sector's significant ties to Asia, which accounts for approximately 30% of revenue for European luxury firms. The bank also cited other positive trends, including solid demand in the United States, Korea, and Japan, as well as a 4% strengthening of the Chinese yuan against the euro since April.

China's Economic Headwinds

The call for stimulus stems from alarming economic data out of China, which BofA economists believe increases the likelihood of policy easing. The bank suggests policymakers could signal support as early as the late-July Politburo meeting, a move that would likely surprise markets.

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Key indicators of the slowdown cited by the bank include:

• Annualized GDP growth slowing to 3.6% in the second quarter, the weakest reading in over three years and below the government's target.
• Real retail sales falling 8.6% on a three-month annualized basis, the weakest reading in more than 30 years.
• Fixed asset investment declining 16.5%, the weakest on record.

Broader European Market Caution

Despite the bullish call on luxury goods, BofA maintained a negative overall stance on European equities. The firm's analysts warned that the Stoxx 600 index, trading within 2% of its all-time high, is "priced for perfection" with record-level margin expectations and an equity risk premium near a 20-year low.

Based on its macro assumptions, BofA's models imply 8% downside for the Stoxx 600, forecasting a drop to 595 by the fourth quarter. In line with this caution, the bank remains "Underweight" on sectors like European semiconductors, banks, and capital goods, while retaining "Overweight" ratings on chemicals and food and beverages.