Luxury is back – ask investors!

Members of the Hayek family at the head of the Swatch Group insist they have little interest in how the group’s shares are doing on the stock market, and even less interest in what analysts have to say on the matter. They consider themselves first and foremost as manufacturers, not speculators looking to make a fast buck. Which is a shame, considering investors are clearly on their side. Over the six months to end May, shares in Swatch Group progressed by 32% on the Swiss stock market, having peaked at 38% in the days before this cut-off point. This last-minute softening may seem out of step with the upbeat mood coming from the stage at the shareholder general meeting held on May 24th. In reality, swayed by the lack of any truly exciting announcements, many investors will have preferred to play safe, sell while shares were at a sufficiently high level, and pocket their gain (“profit taking” in industry jargon). Given that share prices rise or fall according to information available, the moment was well-timed to cash in all or part of their investment.

There’s a reason for this six-month rise, as foreign trade figures for Switzerland recently confirmed. Statistics supplied by the country’s customs authorities and published by the Federation of the Swiss Watch Industry (FH) show that shipments of Swiss watches are back on track. The upturn kicked in during autumn 2017 after a two-year dry spell, the effects of which have yet to be fully absorbed. In May, the Convention Patronale de l’Industrie Horlogère Suisse, which represents employers in the Swiss watch industry, reported that “at 29th September 2017, the watch and microtechnology sector in Switzerland employed 54,944 people. This is 1,858 fewer than in 2016 (-3.3%). This decrease, which comes on top of a 3.4% decline in 2016, is indicative of a still uncertain economic context.” The organisation goes on to note that the last significant round of job losses came in the wake of the subprime crisis. The sector cut some 4,000 jobs between 2008 and 2009, but went on to hire 10,000 new staff over the following six years.

Going up

All hope is not lost. Far from it, in fact. Having stabilised over the second half of 2017, watch exports from the Alpine nation are enjoying what the FH describes as “sustained growth”. It reports how “after a relatively slack month of March, growth of Swiss watch industry exports gained momentum again in April. Their value rose strongly by 13.8% against April 2017 to reach CHF 1.8 billion, so reverting to the rate of growth posted for the first two months of the year. Cumulative watch industry exports have already totalled CHF 6.7 billion, an increase of 11%.” From a market perspective, both Hong Kong (+26.8%) and China (+17.1%) have performed strongly since January, as has Japan (+19.6%). The United States (+9.8%) is waking up from its deep sleep, too. Increases such as these in the top four export markets are enough to put a smile on the face of Swiss watch brands.

And they’re not the only ones. Ever since this turnaround, the luxury sector has reappeared on investors’ radar, leading to a surge in share prices on a par with that of Swatch Group. Kering and Hermès are both riding the crest of a wave. For the six months to end May, shares climbed 43.8% for Kering and 40.2% at Hermès. LVMH has nothing to be ashamed of either, with a 24% increase. Coming back to the watch sector, Movado clocked up a solid +68.3% over six months on the New York Stock Exchange. Only Richemont (+5.5%) has been caught lagging after results for the year ended March 31st 2018 fell short of analysts’ expectations. Needless to say, these are the kinds of performance more commonly associated with venture capital. Luxury has so far never fallen into this investment category and returns will likely contract in the medium term. Even so, it’s clear to all that luxury is back!