Month: November 2023

Watch market update 2023 Fall/Winter

 
High inflation started the hike to higher Interest rate, which in turn aims at nullify consumer’s spending to cool off inflation. Although now might be at the end of interest hike, but the rates cuts might not come as fast as we hoped for; we believe high interest rates will persists into 2025. New conflict in the Middle East and the ensuing tension generated this situation worse.
 
Resale price for luxury watches may continued to fall, as effect of monetary tightening kicks in. On our previous review (6month ago), we were expecting price to fall as spending luxury will slows and further dip in prices wasn’t unexpected:
 
To simplify the discussion we will talk about high interest rate rather than inflation. Previous narrative on inflation was important since we were trying to predict how high the rates will go. Next we need to know how long these rates will hold, and to look at the effectiveness of these actions, the extend the economy will slows and consequently the consumer’s confident and spending. COVID19 stimulus boosted spending as the cash handout was effective in preventing a melt down of the economy during the lock downs, that however sowed the seeds of a runaway inflation in 2021, almost all asset classes including luxury goods become entwined with speculations.
 
In 2022 the start of a sharp hike interest rates along with the resumption of travels, started the decline in the luxury watch price. Because of the bubbly watch prices, it quickly came crushing down, many of the hot models Rolex & Patek Phillippe prices halved (off the peak) just a year later.
 
Prolong period of elevated interest rates will eventually hurt spending, as high cost of borrowing slows down the economy and affecting employment, wages etc. Demand for luxury will reduce too.
 
 
 

Rolex Submariner 126610LV

What might happen?
The trouble in China’s property market and the shadow banking looms. For certainty we are not able to get an accurate picture of the situation there right now. Western analysts and Chinese information will never sync, hence it is better to take a more moderate stance when assessing the impact from the troubles there. Chinese demand for luxury is the key driver for demand for Swiss watches over the past decade or so. It is understandably the factors will have a negative pressure in the luxury watch market. Keeping interest loose monetary policy (like Japan, BOJ) will be critical to prevent any crash in the Chinese economy. This However, this will further dampen the Chinese appetite for luxury watches.
 
The wars in Ukraine and Middle East:
The world attention on the war in Ukraine is diverted to the troubles in Middle East. So far both conflicts are localized, but ongoing tensions can easily cause a spark in the Middle East’s haystack. Rich oil states are big patronage of luxury watches. They definitely going to cause the market to stir should they be drag into conflict of any sorts.
– Reopen of leisure travel:
As we stressed previously, the resumption of travel after Covid19 has now played a significant part to the slowing for watch market. Travel and vacation will be prioritize
over buying of luxury goods in 2024 through to 2025, especially when luxury watch prices continue to unperformed.
 
Investors and Speculators Exit:
Similar to crypto and NFT, the once coveted Swiss watches like Rolex, Patek Philippe AP, Richard Mille etc. became speculative in 2021-2022. And as quickly, it fizzled out.
 
With market prices now close to pre-covid. It is painful but inevitable, once the speculative forces were in play, it usually don’t up end well. This may plays out well for genuine watch collectors since “investors” fled the scene.
– the return of the artisans focus watches. Collector focus will divert back to the quality and the beauty of the creations, rather than the “future value”. With the demands of luxury watches expecting to slow down during the next 2-3years, this allow watchmakers catch a breather and shift their focus to making higher quality models, rather than focus on meeting the seemingly in-exhaustive back-logs.
– situation at AD wait list improves, bundles strategies will no longer can help AD boost sales. It is back to human interaction and sale convictions to entice collectors to swipe their cards. The return of luxury shopping experience.
– Interest rate cuts:
 
Markets of late become very buoyant by the talk of rate cuts happening as early as next March. This is something we have to be very careful about. Should they done it too soon, the inflation be come back strongly again, it will be harder to cool off again. Just the talk of rate cuts can cause the Market to celebrate and DJIA almost hitting all time high. Quite blatantly, the condition is obviously to ready rates cuts, there is just too much liquidity and purchasing power out there. Any sort of positive news or will spark such massive rally; it is too early for such victory lap, because war against inflation is not won yet. With USA presidential election approaching, political pressure may come into play too.
What we ought to do?
Our philosophy is always avoid the herd-mentally, and avoid assets and shares when late in the game, avoiding them when at uncomfortably high valuations. Take necessary profits and wait patiently for new opportunities.
While we are avocation self-control and being prudent over the past year, that doesn’t mean we have totally stop spending on luxury. Having avoided the investment pitfalls over the past year and while having shifted huge chunks of portfolio to a safer interest yield accounts or bonds, etc. why not reward yourself with a nice watch?
 
However, in lean times we do get better service in luxury boutiques and restaurants. Spending on times when your peers are not capable of, it is very visible. When times are good everyone are just trying to outdo each other. By the law of diminishing return, luxury become “expensive” and “competitive”; luxury is “more exclusive” during downturn, walk into a near empty boutique and there will be at least a couple of SA waiting to serve you. Money is spend“more wisely” and more efficiently.
 
Situation now limits what we can gain from investment into physical assets, but that doesn’t mean we cannot buy. If a genuinely grail watch appeared at an acceptable price. Why not consider?
 
Let’s continue the process of reviewing our watch collection. Trade or sell off the excess watches and have to fund ready for grail or simply redeploy the cash elsewhere. I cannot stress more that protecting capital is always the most vital part of investment. Chinese proverb: as long there are trees on mountain, and we won’t have to worry lack of fire wood.
Brands in prospective:
 
Rolex:
Rolex, one of the largest private entity that creates physical asset, had since acquired Burcherer, a leading luxury watch retailer in Europe. They also rolled out the certified used Rolex program, aiming to capture a segment of used market as the retailing network. While we are yet to understand the impact, one thing for sure is Rolex now have the influence across the entire Rolex watch’s life span (R&D>design>mfg>sales>servicing>reselling>vintage recertification/sales). This impact probably will be clearly 1-2years down the road.
 
Patek Philippe:
Patek Philippe continues its color and gems-setting trend, they also created a minute repeater on Aquanaut, ref. 5260/355R. The first repeater ever on the PP sports models. Judging for the recent Nautilus and Aquanaut release, we will be expecting Patek Philippe to produce more Aquanaut/Nautilus in precious metals rather than in SS. With Nautilus 50th Anniversary, just merely 3years away (2026), we won’t be expecting 5811/1A or 5812/1A to launch anytime soon.
 
Audemars Piguet
AP perhaps is the biggest loser of all. The Royal Oak 50th Anniversay haven’t be a success unfortunately. They need better better innovations and ideas in order to recapture the market share. In the weakening it will be very tough.
What have Les Precision been doing:
The effort to lower our watch inventory it is slower than expected, since the last update we mentioned the strategy for 2023 will be a 30:40:30 (watches:fixed income deposit:cash). However, it seems the watch market situation deteriorated faster than we expected. We decided to cut losses on some watches we had, as always most important is always capital preservation. Inflation is far from over, we believe FOMC to keep interest rate above 4% at least throughout 2024. Work on inflation is far from over, with inflation lowering much slower than expected. We are worry about the holding of other physical assets, including properties and precious metals. Now the world is in the process of ending inflation and what will follow WILL BE THE REVERSE. It is still a far shot, but it is better to drill in this concept and place the bets correct before big institutions recognize and follow suit. Assets will become “less investible” as money supply dwindles down. It is important to understand that, it is matter of time before assets prices drop further. Hence keeping wealth in cash is more important than anytime since 2009. It is hard to understand concept, and the reason why we want to put this forecast out 12-18months before it happens, is because it is getting much harder to liquidate assets going forward. Hence, it is better know and prepare for it before the masses wake up to their senses.
 
Disclaimer:
* Do note that “prices” we refer to in this article are referencing from the grey market. Watch prices can be very volatile recently. Any reference to the price and value is only valid at the point of writing.
* We are not affiliated to any brands, neither do we received any advertisement money. This is purely written out of individual views and standpoint, we do not take responsibility of any losses result from the actions taken according the information or views published above.
* This article is written based on the current understanding on the world and financial situation; situation can change or deteriorate. We will also disclaim against the other possibilities of disruptions to the economy like for example trade wars, natural disaster or oil/energy supply shock.