Tsunami in the Swiss watch industry

Swiss National Bank's decision to liberate the Swiss franc against the euro has caused a real earthquake in the Swiss luxury watchmakers.

Leeson. 21/01/2015
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Swiss National Bank’s decision to liberate the Swiss franc against the euro has caused a real earthquake in the Swiss luxury watchmakers. The measure, known 10 days before the International Meeting of the Haute Horlogerie in Geneva (SIHH), the most important of the year for the industry, has led to huge stock declines and will surely require extraordinary measures by the manufacturers

Most of the industry manufactures its watches in Switzerland, so the decision hits their costs and penalizes their competitiveness compared to other developed markets. The rise of 15% of the Swiss franc causes an immediate decline in margins, so manufacturers have no choice but to raise prices or reduce costs if they want to maintain their profitability.

Richemont, Swatch and Patek Philippe are some of the companies affected by the decision of the National Bank of Switzerland. Richemont is the most penalized because it is the manufacturer of many of the 15 best-selling luxury brands. Most of its products come from Switzerland, so both income and operating costs depend on the evolution of its currency. Its stock has fallen 20% since the news, the largest drop in twenty years. Swatch has suffered a very similar punishment, a 20% drop since then.

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Negative reviews by experts did not take long to surge. JP Morgan has lowered its price target of Richemont by 16%, while Barclays estimates that a 10% appreciation of the franc reduced its earnings by 9%. Swatch also is in trouble, as it has 80% of its operating expenses denominated in Swiss francs, so a franc appreciation of 10% would reduce its profit by 18%, according to Barclays. At the industry level, the firm Zuercher Kantonalbank now believes sales will recede in 2015, up from its previous estimate would increase slightly this year.

The good news is that most likely the falls of recent days have discounted all or most of the negative impact of the appreciation of the Swiss franc, so we could think that there will not be a further severe punishment in the stock market. In any case, it will depend on the capacity of reaction of the manufacturers to overcome the situation.

Disclosure: The author is not responsible for the views expressed in the article. The text has been written freely expressing ideas, without receiving any compensation. The author has no business relationship with any of the companies whose shares are listed in this article.

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