Investing.com -- UBS has downgraded shares of Swatch Group AG (SIX:UHR) and Moncler (LON:0QII), citing soft demand in key luxury markets, particularly China, and a challenging outlook for the luxury goods sector overall.

The brokerage reduced its rating on Swatch to "sell" from a previous "neutral" and lowered its 12-month price target to CHF127 from CHF178.

Similarly, UBS downgraded Moncler to “neutral” from “buy”, citing weakening demand and a challenging macroeconomic environment affecting consumer spending.

Swatch faces a prolonged downturn due to its high exposure to China and structural inefficiencies. Swatch’s largest market, China, which accounts for about 35% of its sales, continues to see weak demand.

UBS estimates that Swatch’s EBIT margin will decline to around 9.5% by 2028, significantly down from its previous peak of 25% in 2012.

UBS has also cut its earnings estimates for Swatch, with a 24% reduction in FY24 earnings per share forecast, and even larger cuts of 47% and 48% in FY25 and FY26, respectively.

UBS cited weakening data from the sector, particularly in Asia, where Swatch has high exposure. It also flagged that recent Swiss Watch Export data showing growth was likely skewed by one-off events, such as the Watches&Wonders exhibition in Shanghai.

UBS projects a revenue decline for Swatch in FY24 of 12.6%, followed by a marginal recovery of 0.7% in FY25.

The company’s EBIT is expected to drop sharply by 63.1% in FY24 before recovering modestly in subsequent years?.

Moncler, another key luxury player, is also facing challenges, particularly in its core European and Chinese markets.

The company has benefited from high demand for luxury outerwear, but UBS analysts warn of softening demand as consumer spending in key markets slows down due to macroeconomic pressures.

UBS downgraded Moncler lowered its 12-month price target to €53 from €63, pointing to concerns about a prolonged downturn in demand for aspirational luxury brands.

UBS's research indicates that the recovery in China is likely to take longer than expected, which is a critical market for Moncler.

Additionally, the slowdown in demand for luxury products among aspirational consumers in Europe and the U.S. is putting additional pressure on Moncler’s sales outlook.

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