The restrictions on COVID will surely eased off in later half of 2022, this will make way for boarder expansion economy and reprisal for industries/businesses battered by the pandemic. Before we pop the champagne and dusk off the travel bags, let analyzed whether these optimism indeed for the better, especially the lofty price luxury watches.
Background
The Quantitative easing policies from the central banks has been in place for past decade. Just when they are in the process of tapering and increasing interest rates, COVID struck. Backed by almost unlimited money supply, crashing of economy was averted. When the system is flush with cash, along came the runway asset price and unwanted inflationary pressure. Money have to spend or invest somewhere, this will explains the phenomenal price of Rolex and Patek Philippe sports’ watches recently. Moreover, many people now find it lucrative to hold (or hoard) watches, this resulting in further shortage of watch supply coming onto the market, as result, further escalate the prices.
War in Ukraine:
Russia is being punished with heavy sanctions, but collateral damage hits both the Russian’s economy and the rest of the world. In any war there are only losers, here’s why:
– Russia is an exporter of energy, gas and oil price export ban is pushing the energy prices up across the world. Every type of raw materials, agriculture produces, and manufactures products are affected; basically almost everything requires energy to produce, process and transport.
– Russia is the largest country with enormous natural resources, banning the export of mineral and ore, raw materials cost will be driven up too. Food price will be affected too, as both Russian and Ukraine are the largest gain producers in the world.
– Precious metals price are up. Uncertainty of the conflict drove the gold prices up.
The China’s big COVID question:
China zero Covid policy, means it is going to cut her people away from globe travel. This is bad for many of the embattled economies that rely heavily on Chinese tourism, thus slowing down the prospect of recovery post Covid in these countries.
Inflation?
2021 inflation was resulted from excessive monetary supplies that causing excessive spending habits; 2022 will be the story of rising energy/material/food cost. 2022 is going to be more painful, every house hold is going to have less extra cash to go around each month, after paying for the life essentials. There is also a general fear or reluctance for investors to keep cash is this situation, this lead to a rush into investment of assets, which may lead to the likelihood of an asset bubble. But in due course, this also may cause central banks the rethink the plan to hike interest rates, as they don’t want to overdo it and stall the economy or bursting the asset bubble which lead a much serious situation.
By now we more or less understood the reason why watch prices shot up. Many people now consider Swiss Watches to be an asset and some of them invest their money on watches in favor of the more traditional investment like shares, bond, etc:
– Popular models from Rolex, Patek Philippe, Richard Mille and Audemars Piguet sold out and resale price skyrocketed. This unfortunately also created a sales culture which many of us dreaded: bundles deal (purchase with purchases).
– Efforts by these above brands to curtail the premium pricing of watches resulting in AD forcing customers to take up “bundles deals” and customers are require hitting certain amount spent before allocating a hot model watch like Rolex. This not only boost sales for the AD, as customers now are force to buy the less popular brands like Tudor IWC, Franck Muller, Bulgari etc. in order to “clock enough purchases”. The getting people to buy watches that they don’t need caused a huge excess stocking of these models in the resale market. These watches are traded at a fraction of the retail prices. Huge losses in these watches means that the hot Rolex have become more valuable; as customers “sacrificed” huge losses in bundles just to have a chance to buy a Rolex. While it may look good to the export numbers of these lesser brands, the real issue is the lost of reputation and desirability are actually irreversible – damage is permanent.
What might happen?
The big 4 (Rolex, PP, AP and RM) are set to continue the boom but at the same time, we are also very cautious:
– The Fed Reserve’s hawkish in their stance to combat the inflation this year. Money is supply is draining at both sides (by the monetary policies as well as the rising commodity costs).
– War in Ukraine is casting a cloud of uncertainty in the wider economy and creating chaos in the commodity markets.
– There always concern on the 2 largest watch market: USA and China (USA’s rising interest rates and high inflation; China’s property market and COVID19 lockdown)
– Resuming of leisure travel and people spending money on travel again, cutting back on buying luxury goods and watches in their local resale market.
While there are still factors sustaining the demands of luxury watches:
– GST increasing to 9% in 2023. This drives an increase buying in latter half of 2022, before the tax hike in Singapore.
– People assuming that only way to combat inflation is to continue to buy assets. (But buying asset at inflated price normally does more harm than good)
What we ought to do?
As always, we urged everyone not to put all the eggs into same basket. While we can more or less say watches are an asset class that can provide a hedge against inflation, but the truth is very trend-driven. Keeping an overly hype-upped watch is as dangerously as keep a speculative stock. Trends come and go, inflation is 5% a year, watch price can easily drop more if they are out favor. Even the incredibly hot Rolex SS Daytona 116500LN already fell more than 5% over the past month. This is equivalent to more than a year worth of inflation. So the more we to review our existing collections and offload watches that we don’t wear from time to time. After all, we have a good reason why we are not wearing some of these watches in our collections. This is good way to trim our collection and free up capital for new purchases. It is also necessary to take profit from watches should price become too attractive, after all we want both enjoy wearing watches and at the same time realizing capital gains whenever it is possible.
Brands in prospective:
Rolex:
Rolex watches have performed very well in the past 9 -12months. No major discon models this year for us to be excited: Air-king 116900 and Deepsea 126660 gotten upgrading and these models should see a price drop slightly as a result. We are looking to a price correction of about 10-25% for the popular SS Daytona, Submariners and GMT Master 2 since they are really overpriced. The supply will continue to be limited and costly since ADs are still sticking to bundle deals strategy, this will help to support the price from crashing. 5-digits model will continue to be the safe haven; their price movement will not be as volatile as the ceramic models they can be a safe hedge to inflation.
Patek Philippe (PP):
What a year for Patek Philippe Nautilus and Aquanaut, some of these are now worth than grand complication watches. This is undesirable because PP will not want Nautilus to be as famous as the brand, but ironically it is Nautilus and Aquanaut that make PP relevant in today collector’s market. PP shrewd move to discontinuation of the popular model 5711/1A, but yet releasing the immaculate end-of-production models (5711/1A-014, 5711/1300A-001 (green dial) and Tiffany & Co 5711/1A-018) had sent collectors into pure ecstasy. This caused a crazy demand for the sports PP and caused them to be traded at the intoxicated prices now. We noticed Patek Philippe perhaps are changing strategy on the sports models they haven’t launch the new models Nautilus during the Watch & Wonders this week. I suspect this is to give the industry a chance to focus on the new (non-Nautilus) offerings. They can simply do a soft launch for Nautilus and Aquanaut on a later date. We are concerned with excessive valuations of Nautilus and Aquanaut; it is possible they will correct 20-30% from the peak prices over the course this year.
Audemars Piguet (AP)
Much anticipation on AP Royal Oak’s 50th Anniversary fizzles late last year. To make matter worse, they re-launch RO ultra thin as 16202, with practically the same look. Perhaps it is Patek Philippe who decided to gate crash Royal Oak 50th birthday with the Tiff & Co limited edition 5711/1A; whether it is pure coincidental or deliberate, it certainly shows that Patek can easily beat AP at their own game. The master of hype (AP is known for their mastery in using color and limited editions) was clearly beaten by a simple stroke of genius from PP. Still this isn’t the end game for the ROs, in fact this is a start of the new gen of RO that set to define and be the benchmark for mechanical sports for decades to come.
What have Les Precision been doing:
Looking back over the past 6 months: regrettably we under-invested in Rolex, instead we opted to keep a lighter portfolio of Rolex (mainly the submariners and Seadwellers. Consequently, we missed out the large gains of the Daytona or GMT. Some readers will recall that we are already guarding against these red hot Rolex models, so we can never deviate and make exceptions in this period. Deviations can really hurts in the world of investments. However, we did well with PP Nautilus during this period. These Nautilus watches were added in the late 2021 was promptly cash out in Jan-Feb. We are preferring to hold larger cash and fixed income position (interest is going up, yield will increases). Although we feel the Big 4 (R, PP, AP & RM) are overpriced, but a crash of prices seems very unlikely. We will monitor for next 6month before whether to make substantial bets. It is still a lesser evil to keep cash: remember we don’t need to be investing all the time. If there is nothing worth buying, we don’t buy/invest. Inflation is bad, but it is a lesser evil comparing to overly priced assets – the latter can kills your wealth if it crash.
