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FRANKFURT (Reuters) - Chinese demand for premium brands will help luxury stocks continue to outperform even in the face of a shaky U.S. recovery, inflation in Asia and peripheral Europe's debt crisis, a Pictet fund manager said.
"The potential of China remains huge," Laurent Belloni, manager of the Pictet Premium Brands fund, which manages assets worth around 1 billion euros ($1.4 billion), told Reuters.
He cited the growing number of billionaires there and the emergence of the "increasingly sophisticated and well-educated" middle class.
He said issues such as the debt crisis in Europe and one-off shocks like the Japan earthquake tend to hit sentiment only briefly and that demand for established European and American premium brands shows no sign of slowing.
"We are definitely concerned, but not worried. We have been facing a lot of these issues for a while now," he said, adding that the fund has always rebounded quickly from any dips and outperformed the benchmark index.
Tapping into the growth story of the wider luxury goods sector, the fund has posted cumulative returns of more than 6 percent year-to-end-June, outperforming its benchmarks, the MSCI World Consumer Discretionary Index which is up about 2 percent, Belloni said.
Top holdings include LVMH, Richemont, Tiffany, Burberry, Swatch, Polo Ralph Lauren, Estee Lauder, Starwood Hotels, Christian Dior and BMW.
Last month, French luxury group LVMH secured EU approval for its 3.7 billion-euro purchase of Italian peer Bulgari and Belloni said that this may be just the beginning of a string of mergers and acquisitions in the sector.
"I do believe that there will be a lot of M&A activity in future," Belloni said, naming Tiffany, Burberry and Estee Lauder
as just some of a plethora of potential acquisition targets.
The fund also holds French group PPR, which owns Gucci, Balenciaga and Puma and which is busy on the acquisition trail, having acquired Swiss watchmaker Sowind Group and U.S. clothing brand Volcom over the last couple of months.
"PPR certainly has the power for acquisitions," Belloni said.
With demand from emerging economies helping the sector rebound from the global credit crisis, luxury companies have also been active on the initial public offerings (IPO) markets.
"After Prada we may well see Armani or maybe Italian suit maker Zegna preparing for a flotation," Belloni said, adding that the whole sector showed solid growth in the first quarter and would likely show that the upwards trend has continued, when the second quarter reporting season begins.
Burberry kicked off the luxury reporting season on Wednesday with first-quarter results above forecasts, driving its shares to a fresh high.
Editing by David Cowell