Sliding Swiss Watch Exports "Could Be Negative For Luxury Stocks" 

Swiss watch exports have declined for the second time in three years, primarily due to a slowdown in shipments to China and Hong Kong. Sliding demand for luxury timepieces comes as the world's second-largest economy suffers from a litany of economic challenges, including an underwhelming pace of economic growth, deflationary pressure, a property rout, a vicious bear market in stocks, and worsening Sino-US relations. 

China's economic downturn has made consumers more cautious about spending. Perhaps the direct result of this is evident in a new report from the Federation of the Swiss Watch Industry that shows exports of timepieces from Switzerland fell 3.8% by value in February to $2.4 billion versus the same month a year ago. This is the second monthly drop since Coivd. The number of watches also fell 5.2% to 1.2 million units. 

The trade group said it was the first significant fall "after two years of steady growth," attributing the drop to sliding demand in Mainland China. 

Exports to China and Hong Kong, the second and third largest markets, plunged 25.4% and 19%, respectively. This means China's economic slowdown is rippling across the world to European watchmakers. 

Even with some more recent positive macroeconomic indicators indicating that the country's GDP growth rate in the first quarter of this year will be around 5%, the real estate crunch has throttled consumer spending. 

China has served as the engine of global growth, but its deflationary pressures, which result in sliding prices, hit corporate profits and prompt consumers to delay spending. The market is realizing this, as Richemont and Swatch Group shares drop 3%. 

Are European luxury stocks about to peak?

In a note to clients, RBC Capital Markets analyst Piral Dadhania warned that the news of slumping Swiss watch exports could be a negative read for luxury stocks. 

Dadhania said, "This could read across incrementally negative for hard luxury stocks." 

"Conversely, we note the UK and to a lesser extent US regional performance could be viewed as stable to incrementally less negative for Watches of Switzerland," he added. 

At the same time, indications are emerging that the market for pre-owned watches may be bottoming. 

Meanwhile, there are emerging signs that the market for secondhand timepieces is bottoming. However, deflationary pressures from China and a slowdown in shipments could exert downward pressure on prices. Nonetheless, deflationary forces from China might lead to additional price pressures.