Why are long-only funds staying away from luxury?

Luxury has already gone through a hefty de-rating, yet many long-only investors are still sitting on the sidelines. Why?

According to Morgan Stanley, the issue is no longer valuation alone. Instead, investors are questioning whether the industry's medium-term growth has permanently changed.

The bank argues that the drivers that once underpinned luxury's premium ratings are fading. At the same time, consumers are increasingly embracing second-hand luxury, while spending is shifting towards areas such as wellness and longevity.

"The historical pillars underpinning luxury’s premium are being challenged, or increasingly normalizing, such as strong pricing power, powerful structural growth tailwinds (China and overall democratization of luxury), expanding margins and low perceived earnings volatility," write MS analysts.

That uncertainty over the sector's medium-term growth rate is, in Morgan Stanley's view, keeping long-only funds away despite cheaper valuations.

The bank sees little scope for multiple expansion in the next 12 months and believes investors are increasingly treating the slowdown as a structural shift rather than a cyclical dip.