Shares in Burberry Group PLC (LSE:BRBY) rose 2.7% after UBS strategists turned positive on the luxury sector, reversing their previous cautious stance and upgrading it from underweight to neutral.
UBS argued the luxury sector had become "rarely oversold," creating an attractive short-term opportunity. Historically, whenever valuations have reached this point, luxury stocks have outperformed nearly 80% of the time over the next three months.
Despite recent worries about earnings, UBS said luxury stocks appeared to have fallen further than justified by the current downturn. Crucially, valuations for luxury shares, though still above historical averages, were no longer extreme compared to the broader market.
UBS also pointed to improving conditions in the US, which accounts for roughly a third of luxury sector growth. Rising equity markets and proposed tax cuts aimed at wealthier households could help stimulate demand, analysts said.
Yet UBS remains cautious about overweighting luxury due to lingering weakness in China, which accounts for nearly 30% of luxury spending globally. Slowing economic growth and ongoing problems in the Chinese housing market are significant concerns, limiting further optimism.
Still, the longer-term picture is favourable, with luxury brands likely to benefit from the growing affluent middle class in emerging economies like India.
Investors responded positively to the upgrade, betting that Burberry and its luxury peers might finally be poised for recovery after months of weakness.
The stock was up 33p at 1,243p.