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Fine watches survive China slowing down

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Commenting from the international fair of fine watchmaking, SIHH Geneva, Scilla Huang Sun, investment director at GAM, says: “The strong fundamentals of luxury watch brands have been overshadowed by concerns over China, but the growth story from wealth creation in emerging markets shouldn’t be underestimated. Two years into the Chinese government’s anti-austerity measures, bad news has bottomed out and the investment case for luxury companies remains firmly intact.

 “Weakening sales of luxury watches in China and Hong Kong are mainly due to currency and regional price gaps, not a lack of demand. Around 30 per cent of watches are exported to Greater China but even this figure underestimates real demand, with increasing numbers of Chinese tourists travelling to Europe and Tokyo in search of the best price. More generally, retail sales in China are still growing at 10-11 per cent, a far more robust level than macro headlines would lead us to believe.
 
“The launch of the Apple Watch signalled the rise of the smartwatch, but incumbent brands are also looking for a bite of the cherry. Tag Heuer’s Android smartwatch is just one success story. These products are seeing real demand at the moment thanks to their newness and good functionality, but competition is high and you can only ride the wave of the latest technology until another brand develops something better. Nevertheless, I expect luxury watch brands to introduce smartwatch-like functionalities without compromising their brand equity.”
 
“Smartwatches lack the tradition and heritage which are the DNA of a luxury brand. It’s a different product and we don’t expect a significant impact on the market share of luxury timepieces. It’s the fashion watches that are more likely to feel the heat of the competition, with their more fickle consumers buying and keeping products for only one or two years.
 
“Swiss-made watches still make up the by far largest share of the high end market, renowned for their brand heritage and outstanding levels of craftsmanship. The appreciation of the Swiss franc was felt across all exporters with production bases in the country, and while some like Richemont have been quick to adjust their prices, price gaps still remain. But while the franc has gained especially against the Euro, its relationship with the US dollar, to which a large proportion of the luxury watch market is either linked or pegged to, has remained relatively stable.
 
“In a sector with high barriers to entry we favour companies like Richemont and Swatch with strong brand portfolios. Big can be beautiful in luxury, as both companies are benefiting from scale of production, distribution and marketing. Investor sentiment towards Swatch is quite negative at the moment and the stock looks cheap. Despite the slowdown over the past years and the following downgrades by analysts, the market still expects an operating margin of 18 per cent for 2015 and earnings growth of over 10 per cent this year.”

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