How Draghi could give a boost to luxury stocks

Weaker euro will help luxury stocks: Pro
Weaker euro will help luxury stocks: Pro

Europe's luxury brands could get a boost thanks to measures introduced by the European Central Bank (ECB) last week, analysts told CNBC.

A strong euro has been a headwind for major European luxury houses including LVMH and Gucci parent company Kering, which has complained about the negative currency effects on earnings.

But since ECB President Mario Draghi announced last week a cut in the central bank's benchmark interest rate and plans to launch a bond-buying program, the euro has moved lower – making the euro zone's products more attractive to other countries.

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Analysts said the move in the single currency would be a tailwind for a luxury goods companies' earning and stocks.

"LVMH in the spring had a tough earnings report and that came from the very strong euro. We think this is totally going to change now following what Draghi did last week," Patrick Armstrong, CIO of Plurimi Investment Managers.

"We think the weak euro is going to be in play for the rest of this year and next year and that's really going to be a tailwind for these companies."

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Armstrong recommended buying Swiss watchmaker Swatch, Cartier parent company Richemont and LVMH, known for brands such as Louis Vuitton and Moet and Chandon champagne.

'Relief' for sector

A strong euro has also put tourists off shopping in Europe as it is no longer perceived as a cheap place to buy luxury goods. A weaker euro should reverse this trend, one analyst said.

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"Euro strength has impacted European tourism and shopping coupled with the fact that people like the Chinese are finding it cheaper to buy elsewhere," Rahul Sharma, founder of Neev Capital, told CNBC by phone.

"Ultimately there is a profit impact as well. Over the past few years euro has been strong and the margins were getting squeezed. So that will be a big relief for everybody in the sector."

'Well-positioned' companies

Negative currency effects have been among several problems hitting the luxury sector. A slowdown for the sector's growth in China as well as continued tensions between Russia and Europe over the Ukraine crisis has impacted high-end brands.

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But Armstrong said while European-based luxury companies have been "hit hard", they are well-positioned for the rest of the year.

"I think European companies are hit harder than U.S.-domiciled companies even if they have the same business mix. So I think these have been hit a bit harder in August and are well positioned going forward," Armstrong said.