Swatch: demand for tangible assets will support equities

As Swatch shares languish near pandemic lows, the worst for shareholders is likely over. Keystone / Martial Trezzini

Lockdown in China is hurting sales of Swiss watches. However, the largest watchmaker in the world, Swatch, does not want to stop at its most important market.

This content was published on July 15, 2022 – 11:29

Opinion Lex, Financial Times

China’s “zero Covid” policy has cost the company about 400 million Swiss francs in sales this year. But he still managed to make 3.6 billion Swiss francs ($3.7 billion) in revenue in the first half, 7.2% more than in 2021. The Omega owner also confirmed that it expects double-digit sales growth for the full year as restrictions ease.

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It’s a bold bet that depends on the decisions of an increasingly unpredictable Chinese government. Such a recovery would also only bring sales back to the levels seen in 2017.

But with Swatch shares languishing near pandemic lows, the worst for shareholders is likely over. A valuation of 13 times forward earnings is at the low end of the decades-long range. That rules out all but a full-fledged global slowdown.

Apart from China, the demand for Swiss watches is high. Swatch recorded double-digit growth in most other markets, including Asia excluding China. As with other tangible assets like art, the appeal of Swiss watches, especially high-end ones, increases in times of financial uncertainty. Buyers are looking for stores of value amid rising inflation and the worst first half for the US stock market in 50 years.

In May, sales of watches priced at 3,000 Swiss francs or more increased by 20% in value, according to the Swiss Watch Federation. Retailer Watches of Switzerland reported demand consistently outstripping supply in last week’s results. It still expects growth of one-fifth this year.

This context sheds a favorable light on the swelling of Swatch inventories, even if the average selling prices are lower than those of the major brands. It now stands at 6.7 billion Swiss francs, up 300 million Swiss francs from the end of last year.

Strong demand and rampant inflation make equity writedowns less likely. Add 2.4 billion Swiss francs of cash and 1 billion Swiss francs of goods to the value of the inventory and you reach a total equal to almost 90% of the current market value. At the current share price, the financial exposure to the watchmaker may prove to be as good a store of value as its timepieces.

Copyright The Financial Times Limited 2022

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