“English gentlemen, please fire first”

Back in 1975, 67.2% of British voters answered a resounding yes to the UK’s continued membership of the European Economic Community. Forty years and a raft of concessions later, they said no, effectively taking the United Kingdom out of the much maligned European Union. Beyond purely political considerations – and the naivety, lack of courage and downright dishonesty of the country’s senior politicians paints a woeful picture – the most immediate concerns are for the economic fallout, although it may be some time before they make themselves known, given that Brexit will likely be a long, drawn-out process. Theresa May, who succeeds David Cameron as Prime Minister, must first decide to trigger Article 50, thus launching “divorce proceedings” and the start of negotiations to unravel the thousands of legal and judicial provisions that tie Britain to the EU. The next stage will be equally protracted, when it comes to negotiating new agreements, in particular trade agreements, between Europe and the United Kingdom… if this is the name we can still give a country whose nations are at loggerheads.

Adding to the uncertainty

Once the initial shockwave had died down, share prices appeared to be weathering the storm, although more worrying tremors would make themselves felt inside the UK. Barely two weeks after the referendum, six of the biggest real estate investment funds announced they were suspending redemptions. Due to a drop in liquidity, the six funds, which manage assets of £15 billion in commercial property, were no longer able to pay investors who wished to redeem their cash; not in the immediate future at least. Amid talk of recession, not to mention the likelihood that London will lose its EU bank “passport” and therefore its right to sell financial services across Europe, investors are increasingly fearful that the value of retail and office property could head south. Are they right to show concern? Well, the subprime crisis that knocked the world economy for six began on August 9th 2007 when French bank BNP Paribas announced it was freezing three of its funds that held securities backed by American subprime mortgages…

The outlook for Switzerland is less than rosy. BAK Basel, an economic research institute at Basel University, forecasts that growth prospects will suffer in the short term, while in the longer term the country should feel the backlash from structural weakening in Europe. None of this bodes well for watchmakers. “The Brexit vote opens a period of great uncertainty, which adds to many other areas of uncertainty,” commented Jean-Daniel Pasche, President of the Federation of the Swiss Watch Industry, following the Leave vote. “We can expect lower growth in the United Kingdom, leading to job losses that could affect watch sales. It’s hard to be more precise at this stage. In the immediate term, the most worrying factor remains the strong Swiss franc.”

A too rapid increase in prices

As the seventh-ranking export market, the UK is anything but a negligible quantity for Swiss watchmakers. Shipments doubled in value terms between 2010 and 2015 to reach CHF 1.2 billion, last year gaining 19.3% on the previous year, when exports across the rest of the markets slid by more than 3%. This good health was confirmed for the five months of January to May, as Swiss watch exports to the UK remained stable when other markets dropped 9.5%. Has the British vote to leave the EU pulled the rug from under watchmakers’ feet? Exchange rates, the profession’s current bête noire, could well have an impact. At end 2015, sterling was quoted at just over CHF 1.50 and, on the eve of the referendum, at CHF 1.43. In the two weeks following the vote it crashed 13% to CHF 1.25.

This again raises the thorny issue of whether to adjust prices or margins, bearing in mind that, as Cartier’s newly minted CEO Cyrille Vigneron recently declared, “for the entire profession, the average price of watches has increased too quickly.” In this context, Brexit could almost be seen as yet another “wake-up call to reality, after responding to ever pressing demand for more costly and more complicated timepieces,” again according to Cyrille Vigneron. Analysts at Baader Helvea harbour mixed feelings about the “highly cyclical” luxury industry in general, and clearly foster doubts as to watchmakers’ capacity to adapt to the new market situation: “Already, the branch showed itself incapable of adapting its model to the uncapping of the Swiss franc or the slowdown in the Chinese economy, and was forced to compensate for lower margins through its own accounts.” The industry’s contractors are still feeling the backlash.

In his account of the Battle of Fontenoy in 1745, Voltaire notes the invitation extended by Comte d’Auteroche to the Duke of Cumberland’s troops: “English gentlemen, please fire first.” Three centuries later, the British have taken aim again. This time, the European Union is on the receiving end of their fire, and no-one is immune to flying bullets!