Brands have been big business in recent years – Armani, Gucci and Louis Vuitton are now visible on every high street, not just in the pages of Vogue.

Stock analysts, in their own way, have been equally label-conscious. They too cannot resist the allure of the luxury goods sector – with good reason. Sales of luxury items have grown twice as fast as global GDP since 2003; meanwhile, share prices in the sector have consistently outperformed the wider market.

The way we spend our money has changed in recent years. The priciest brands were once only for the seriously rich – now average customers will upgrade to luxury on some items and go super-cheap on others, often for the same outfit. This is called ‘selective extravagance’ – the Prada-plus-Primark phenomenon.

This trend is particularly visible in the US. The typical income for a luxury goods customer has fallen from $100,000 to $70,000, and around a quarter of the US population now falls into this bracket; so there is the potential for powerful sales growth in America during the next few years.

The Asian luxury goods market also looks set for rapid expansion. Asia already buys around a third of the world’s luxury goods, with the fastest growth coming from China. Sales in Asia should be driven upwards by strong economic growth in the region. We expect to see annual growth of almost ten per cent in China, more than eight per cent in India and around six per cent in Russia during 2007 and 2008. Our outlook for Japan is also positive. Stronger local currencies ought to help too, with the Chinese renminbi likely to grow stronger against the dollar in coming years.

Our favourite luxury goods stocks have good fundamentals, as well as being part of an exciting sector. The stocks discussed here are all cheaper than their peers in the sector, and all have the potential to grow sales in Asia.

We particularly like Folli Follie, which sells jewellery, handbags and accessories. It trades at a 40 per cent discount to the European luxury goods sector – partly because its goods are priced lower than most in the sector, which is thought to make it more vulnerable to competition. But the group generates more than 60 per cent of its sales in Asia, and expects rapid expansion during 2007. We expect that its discount to the wider luxury sector will narrow considerably.

Another favourite is Porsche, the car manufacturer, which has huge untapped potential in Asia. It is busily setting up dealerships across the region, and expects to double its Chinese sales this year. Short-term sentiment is negative on Porsche, with concerns over the immediate growth outlook and the group’s exposure to the dollar, but given the longer-term prospects we think any weakness in Porsche shares would be a buying opportunity.

The vast luxury conglomerate LVMH owns brands ranging from Dom Perignon to Louis Vuitton, and accounted for over 40 per cent of global luxury sales in 2005. It is particularly strong in Asia, with a 2003 survey showing that just under half of Japanese women aged between 15 and 59 owned at least one Louis Vuitton handbag. Despite this, LVMH currently trades at a ten per cent discount to the sector.

Finally, Burberry is one of the UK’s most recognisable brands and the only UK-traded stock in this list. Surprisingly, only five per cent of Burberry’s earnings actually come from Britain, with more than a quarter of earnings originating in Asia and close to another quarter in the US. Burberry expects greater sales of high-margin goods to bring its margins into line with the European average over the next few years. Its successful catwalk brand, Burberry Prorsum, has also raised the brand’s profile recently – we expect the stock to catch up with its European peer group in the near future.

Could the gloss come off the luxury goods market at any point? Luxury itself is never going to go out of fashion. The main risks for the sector would be a global economic slump or terrorist attacks, which have the effect of reducing tourism worldwide.

Of course, we can’t ignore the fact that markets have been experiencing a period of weakness recently. While that continues, highly rated cyclical stocks like these may underperform. But the long-term fundamentals of these companies remain very appealing, and lower prices could actually provide attractive entry points for investors.

Over the next few years, designer labels could add a little glamour to your portfolio, as well as to your wardrobe.

Henk Potts is equity strategist at Barclays WealthThis article is from the April 2007 issue of What Investment.