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What’s Next for the Luxury Sector?

The fate of the luxury sector lies in China's hands

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To start, despite an improving American economy, the luxury story begins and ends with China. This was bad news earlier this year for certain segments of the sector — such as Swiss watches and super-premium wines and spirits (Louis XIII cognac and Chateau Lafite Rothschild wines) — because of a Chinese crackdown on conspicuous consumption and on “gift giving” (ahem … bribery) in government circles.

This was less of a problem for handbag and fashion retailers. As the shock of the crackdown wears off, these segments should recover. But the short-term hit to sales will be felt in the next round of quarterly earnings releases.

Meanwhile, in other segments of the luxury market, it’s business as usual. Daimler (DDAIF), the maker of the iconic Mercedes-Benz, just announced that it was making $2.6 billion in new investments in China. Daimler plans to double its manufacturing capacity by 2015.

So, with all of this said, should you invest in the luxury sector?

I don’t consider the sector the screaming bargain that I did a year ago, but I still see quite a bit that I like. Daimler is one of my favorite stocks (and my choice in InvestorPlace’s Best Stocks of 2013 contest … which it happens to be winning at the time of writing). Daimler is up more than 30% this year, including dividends, yet the stock still trades for a very attractive 8 times earnings. It also sports a respectable 4.2% dividend.

I also like Swiss watch leader Swatch Group (SWGAY). In addition to its own highly successful brands — such as the Omega worn by James Bond — Swatch also makes the “guts” that go into 90% of all high-end Swiss watches. Swatch trades for 17 times earnings and yields 1.24%.

China’s growth looks to be stabilizing at around 7.5%. The days when Western luxury firms could count on 20% per year annual sales growth are probably over, but the “luxury story” will remain the “China story” for the foreseeable future.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management.  As of this writing, he was long DDAIF and SWGAY. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar but also which stocks will deliver the highest returns. The series starts November 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.

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