In May, cryptocurrency market was further rocked by the dramatic collapse of Lunar and triggered the fallout of a major hedge fund, the Three Arrow. These send the crypto world into a downward spiral. The crypto market themselves like the watch market are merely the victims of interest rates hike. The lack for regulations and governance will further exacerbate the situation as we witness several more collapse of the crypto exchange and funds, just months following the start of rate hikes. Rates hike don’t imploded the crypto market, it only provide a spark in the sea of dry hay, as poor regulation and lack of clarity were cruelly laid exposed.

 

Now, we all should come to a consensus that for inflation to be eradicated, 2023 will have be a year with less job opportunities, less salary growth, slightly higher unemployment rate, higher interest and month installment for house mortgages….etc. So spending on luxury will slow down and prices of watch may take a further dip. High interest rates will around longer than most people hope: hence a sluggish rebound watch resale price will be expected. It might be late as 2025 before the watch price will start the appreciate once again.

Previous review: we highlighted the risk of inflation and what are the consequences of Fed Reserve’s action will bring:

 

The inflation of today can be resulted from the Quantitative Easing (QE) policies from the central banks has been in place for past decade. Cheap borrowings flooded the markets with hot money ended up speculating almost on anything with value, from Crypto to Nike Sneakers, from watches to properties. Compounding this problem are Geopolitical problems like Ukraine war which created havoc to energy and food supply chain; OPEC cutting energy output amid European energy crisis, changing weather pattern, trade wars etc..

 

At the same time a very tight job market (favorable wage growth) means the purchasing power of individuals improve and runway asset price and unwanted inflationary pressure follows. When individuals are flush with cash, surely they will indulging or speculating/investing on luxury watches Rolex and Patek watches. These luxury watch is a symbol of wealth and they become a common goal for many.

 

Now as interest rates rise many of these individuals experienced increasing difficulty on the cash flow. Houses bought with low cost loans (low interest rates) previously now have to repay at a much higher SIBOR rates. Some may sell watches from their collection to free up some cash as their priority is to have adequate funds to refinance the loans, to lower the borrowed amount. Cash rich individuals who once lamenting on low interest rates were and decided to put money into watch investment instead for better yield, can now sell of their watches and go back to bonds or fix deposit.

 

Many of the people I spoken to are hoping that the opening up on China economy will no doubt positively impact the luxury market. This might be true, but only for a couple quarters at most. China emerged from the lockdowns much later than all the countries, the people have penned up frustrations and willing to spend. However, at the same time, the world demand for the goods that Chinese produces are waning: Western countries and USA economies are still engaging in a form trade against the Chinese. China just entered the period of negative population grow last year, yet the entire generation are saddled with a housing loan that may take more than a generation to repay. They too will be heading for a 1990s Japan style of housing bubble collapse, yet at the same time have to difficult situation of inflation to deal with. The authorities may have to keep the interest low, to reverse the fortune of the property market, but this will cause inflationary pressure, especially raw material and food prices, which will harm their competitiveness.

 

War is inflationary. Imagine nations spending heavily on weapons, then destroying them in action and buy more again, the cycle continues on. This cycle consumes energy and raw material. It has to be funded so how by someone. It is actually a cycle inflation:

Perhaps now is not the best time to keep non-yielding assets, such as gold, watches, crypto etc. Basically assets that rely on capital (value) gain for profits. (Even properties for that is not rent out also falls into this category, especially those properties that is funded by loans). These will be stagnant in prices, while investors holding them will be losing opportunities on interest generation in bond or fixed deposit (FD).

For example: Rather than buying a Daytona 116500LN at S$40,000, putting this amount of money in the bonds and FD, the investor can instead gets 4-5% (S$1600-2000) return next year.

 

Rolex, Patek Philippe AP, Richard Mille etc. now close to pre-covid prices. Painful for the collectors and investors who bought luxury watches as a hedge against the surging inflation. This correction of 2022 was caused by bursting of speculation bubble. We believe prices will continue to show weakness till 2024 after. Even by then, there may not have a situation of a quick price rebound, as confidence had taken a hit; speculations on watches will not re-emerged so quickly.

 

As always, we urged everyone not to put all the cash into watches. This more critical now as situation now is clearly not the most ideal time to invest into physical assets. While we can take comfort that watches are going to worth some money at the end of the day. In events of economic downturn, watches are the first thing people sell or pawn; most people need a roof, they need a mode of transport for delivery and continuation of the small businesses. Let’s continue the process of reviewing the watches held within our collection. Streamline our collection and at the same time free up capital to fund for new purchases or simply standby some cash for any possible opportunities that may come by. Some affluent individuals may still need material comfort even in lean times, so there is really nothing wrong hanging on to a watch collection. After all we do want to enjoy the finer things in life; we must understand as long there are speculation and profiteering, losing value (or gain) on watches is a byproduct that we all have to deal with.

 

However, the shift trends was evident, current models and newer model/design have better resale price. This means as time goes, a watch actually suffers from degenerative price as it gets older. So it is unlike few years ago, when any discontinued watch is naturally a good investment bet. This we feel is the most troubling now, as it is making modern luxury watches un-investable.

 

 

Rolex continue to lead the market as the premium luxury brand, although speculations had eased somewhat; many people still is Rolex watches and value protectors. Daytona received a total make over for the 60th anniversary; certainly to the delight of collectors who are hopping that the “Panda” and “John Mayer” Daytonas will see significant gains in prices after discon. Also Milgauss was removed from catalog. However, we urge caution in to buying discounted models as the appreciation in price very much depends on the future taste/trend. As mentioned earlier, people prefer now prefer newer and slicker Rolex. We aren’t too sure if collectors will be consider a 116500LN or 116400GV when come to grail hunting. Since 126500LN are making in the thousands and 116400GV seem pretty dull and not as exciting as the GMT or green Submariners.

 

Patek Philippe continues its rebranding process and continue to try be relevant to the trend of the day, launching colorful Grande complications and Calatrava models. I haven’t enjoy looking at these new PP creations over past few years; perhaps they are try too hard to stay relevant to the demand of today’s watch collectors. Needless to say, we aren’t to worry about what we don’t like. We just make sure the Nautilus and Aquanaut remain popular and liquidatable.

 

AP once part of the “Trinity”, seem to join Vacheron Constantine and slipped quiet in to obscurity. After Offshore, AP banked on Royal Oak series to generate the buzz which didn’t happened. The push to introduce tens of new model and hundreds of new colors only left collectors dumbfounded and confused. It back fires big time. We definitely not considering AP watches to be investment worthy anymore.

 

We felt the worst for the watch market is over, yet we resisted the temptation of going all on watches. Although inflation is improving, but still it is far from over; the collapsed of banks in USA only send a clear signal to central banks that they cannot raise rates they deem fit, without harming any parts of the financial system. It is a tricky situation, as slower rise means the battle against inflation will prolonged. It is evident from the sharp rise in gold price lately, that investors rather park their wealth in asset and hold on to the safety of gold. We understand watches can never be on par with the safety of gold, yet better rather than hold cash and be eroded by inflation. (Gold can be subjected to quick price fluctuations as nigh funds or institutions can move vast amount in and out of it as situations arises) We prefer this strategy for 2023, 30:40:30 (Blue-chip watches*:fixed income deposit:cash).

*Some blue chip watches we recommend:

PP 1518, 2499, 5970, 5004, 5711, 5712, 3712, 5980. Rolex sport with stable price history and such sports models.

 

As it stands, we may want to reduce watch holding further as 2024 approaches. It is going to get harder to cash out watch investment, as challenges in the greater economy, will put many people off against buying more watches.