China, once a bastion for Communism, has been pumped with capitalism for the last few years. Capitalism in the form of debt and luxury. Brands have gorged themselves in the – seemingly – never-ending demand for luxury goods, whether it is fashion, wine, art or watches. As the western world reels from the shock of the financial crisis, the country gripped in a modern industrial revolution has been taking the slack for the lack of demand in the traditional markets of Europe and the US and production has been heading east in an unprecedented fashion. Clouds are forming on the horizon however and those who study the financial markets have seen the Chinese central bank become increasingly pro-active in removing corruption and stimulating growth. It seems that maybe the luxury junkie has had its last hit for the short term.
Over the last few months prices of modern Patek Philippe watches have started to tumble at auction. And it is not a coincidence that as the equity markets of the Far East began to slip so did the prices of horology’s golden investment child. While vintage pieces such as Ref. 2499 and Ref. 3448 remain strong modern pieces are being drawn into a minor correction; even such classic references as Ref. 5070.
The problem is two–fold: Countries such as Malaysia and Thailand, whose currencies have seen great devaluation, are using locally sourced watches and selling in Hong Kong to take in USD dollars. The supply of Patek Philippe watches currently in production at specialist dealers in Hong Kong and Singapore is alarming and continues to grow. Perhaps, however, the greatest concern is leverage in mainland China and leverage in the equity markets. Margin calls on Chinese equities have reached staggering levels over the last two weeks and the markets whether it be commodities or everyday items such as watches are seeing liquidation to meet these margin calls. Rare modern pieces such as Tiffany dial Pateks are being offered with the phrase “ would anyone like to bid for …” in a very similar way to the Lehman days and the fall out of the losses on the Shanghai exchanges is rippling through the watch world.
Dealers in London are pragmatic, blaming the traditional August holiday period for lack of passing trade, but even they must be wondering: Can the market sustain a glut of modern luxury watches hitting windows? I have focused a lot on Patek, because it’s a market I’m active in, but other hing-end brands are not immune and if anything face a tougher battle without such a focused and well-funded collector market. The message though is simple. Luxury goods may have desire, but they need the supply of free cash to fuel the bubble. Financial contagion, whether it be from equity routs, tax rises or even war is very harmful to that much needed free cash.
So if modern watches are weak do you seek comfort in vintage? Maybe, but there is a word of caution and that comes from whether the Far East has really come to grips with vintage and whether those collectors wish or need to relinquish solid examples of watches that could have taken years to source. I do see a great opportunity in vintage Rolex and Patek if prices dip, but reference is crucial. I’ve stated on numerous occasions there is an asset class labelled vintage Daytona and there is vintage Rolex and that blue chip reference will hold strong. Certainly high value Daytonas such as Paul Newmans may see a slight correction purely on their underlying cash value, but I believe gold references simply will not budge in price. Demand from the west is strong and supply is next to zero. Look for Patek Philippe watches such as ref. 5004, 3448, 3450 and 2499.
However, the simple days of the blind purchase because an item is a vintage Patek or Rolex are long gone. I would avoid Day-Date Rolex watches, even though they enjoyed a very successful Philips auction. Be also aware of smaller case Patek Philippe complications such as the 1463.
Perhaps the lessons are simple short term. Buy with the view to hold and buy sensible references of high quality. One benefit of watches over other assets such as classic cars is the lack of leverage so in theory the underlying pain should be less. Sentiment however can drive markets to extremes and extremes are where opportunities exist. The fallout from Black Monday should not be a shock. As collectors of assets we have all enjoyed appreciation fuelled by quantitative easing. What these corrections do is focus our thought patterns and collections. The party may not be over, but it’s a reminder that nothing can be taken for granted. Mr. Aurel Bac’s job for the upcoming Philips auctions just got harder.
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