Jun 3, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Hey, Markets readers. Hope you enjoyed "Axios on HBO" last night. We're shortening the newsletter in order to get you the news quicker. But I want to know how you feel about it. Send me an email — dion@axios.com. (Smart Brevity count: 1,059 words / ~4 min.)

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Situational awareness:

  • "Kevin Hassett, who has done such a great job for me and the Administration, will be leaving shortly," President Trump tweeted Sunday night. (Twitter)
  • Blackstone will buy $18.7 billion of U.S. logistics assets from Singapore's GLP Pte in what it says is the world's biggest private-equity real estate deal. (Bloomberg)
  • Readings on factory activity last month showed contraction in Japan, South Korea, Malaysia and Taiwan, and barely rose above contraction in China. (Reuters)
  • Economists surveyed by the National Association of Business Economics see a 60% chance the U.S. goes into recession by the end of next year, after a "surge" in trade war driven fear. (CNN)
1 big thing: Cashing in on the luxury watch bonanza

Illustration: Aïda Amer/Axios

Leveraged buyout experts Apollo Global Management made the latest move into the red-hot global watch market, taking its Watches of Switzerland brand — an official Rolex retailer that also sells luxury imprints Patek Philippe, Cartier and Longines — public.

Why it matters: Watches of Switzerland's successful IPO shows the skyrocketing popularity of luxury watches is not lost on financial markets. The stock debuted Thursday on the London Stock Exchange at an IPO price of 270 pounds (about $341) and rose as much as 17%.

  • Its enterprise value is already 5 times what Apollo paid for it in 2012.

What's happening: Demand for luxury watches is soaring and supply is not keeping up, causing a gold rush in the industry. Once shunned, second-hand luxury watches are now the watch industry's secret sauce.

The market has taken off to such a degree that used watches sold online in 2018 regularly fetched higher prices than new ones.

  • "Based on worldwide sales over the past 15 years, we estimate the value of non-worn watches at $500 billion," online watch retailer Watchbox's vice president Patrick Hoffmann said in an August interview.
  • "Potentially then, the pre-owned market could be bigger than the market for new watches."

The block is hot: Luxury goods giant Richemont, owner of Cartier and Jaeger-LeCoultre, is going for broke, investing nearly $3.4 billion in used watch seller Watchfinder and other online vendors last year. They're not alone.

  • Online retail giants like Alibaba, eBay and Amazon are building top-dollar in-house authentication teams as watches sell for more than $100,000.
  • Audemars Piguet said it would launch a second-hand business this year.
  • Breitling's CEO says the company is planning to buy and sell used watches.
  • LVMH, owner of watch brands TAG Heuer, Hublot and Zenith, is reportedly considering entering the market as well.

But, but, but: It's not all good for everyone. Watch sales are slowing in places like Hong Kong and turning negative in the U.K.

  • Richemont's expansion has increased sales but profitability fell to the lowest level this decade. Farfetch's stock sank 11% Thursday after the e-commerce platform reported a wider-than-expected loss.
  • The online luxury business is currently going through an unprofitable investment phase, with some experts saying it's poised to slow.

Still, there are clearly high hopes for what's to come. "It's no longer a hidden secret anymore," Danny Govberg, owner of luxury watch emporium Govberg Jewelers, told Bloomberg last year. "It has a life."

1 fun thing: The simple yet interesting explanation for why watches are almost always set to 10:10 in ads.

Bonus: "The right approach to 2019 is cautious optimism"
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Data: Federation of the Swiss watch industry; Chart: Naema Ahmed/Axios

Data from the Federation of the Swiss Watch Industry shows the value of Swiss watch exports in 2018 was $21.2 billion — an increase of 6% in sales. However, it was not without uncertainty, notes Joe Thompson, who writes for wristwatch enthusiast outlet Hodinkee.

  • The year saw "a roaring first half versus a meeker second half; a booming Far East versus a slumping Europe; rising unit sales of luxury mechanical watches versus plummeting sales of low-end quartz watches; and relief over the long-awaited rebound in the U.S. market versus fears about the slowdown in China."

"The signs of stagnation, economic indicators and continuing uncertainties at many levels suggest that the right approach to 2019 is cautious optimism," Federation of the Swiss Watch Industry president Jean-Daniel Pasche said in a January press release.

  • "Watch industry exports are expected to continue to grow, but at a more modest level."
2. Low P/E ratios haven't helped companies' share prices

Growth investors have been winning the battle over value investors for some time, but a new report from Bank of America-Merrill Lynch shows that evaluating a company's price-earnings ratio may be losing its value altogether.

  • “Low P/E remains the most popular factor for the 14th year running despite its weak performance for most of this bull market (the factor lagged by 46ppt since 2010),” Bank of America Merrill Lynch's equity and quantitative strategist Savita Subramanian said in a note to clients.

As CNBC notes: "Nearly 80% of investors surveyed by the bank use forward price-to-earnings ratio as a factor when investing, making it the No. 1 factor annually, according to the study. Paradoxically, low P/E stocks have underperformed the market since 2010, the study shows."

3. Mobile banking is finally taking off with Americans
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Reproduced from CivicScience; Chart: Axios Visuals

"It's over," says John Dick, founder and CEO of research firm CivicScience. "Mobile banking should now just be called 'banking.'”

  • For the first time ever, the organization's data shows the percentage of Americans who do most of their banking on a mobile device surpassed those who do none of their banking on a mobile device this quarter.
4. Another twist in the battle over rare earths

Fresh off President Xi Jinping's signal China could restrict the sale of rare earth minerals, a major component in a host of important technological and defense devices, to the U.S., a team of Chinese scientists announced they had developed a new process that reduces the time needed to extract rare earths from ore.

  • They say the new discovery will move extraction from a process that takes days to a matter of minutes, and that it also could reduce environmental costs.

Why it matters: If the process is indeed viable, it would deepen the world's dependence on China for the valuable minerals and elements, locking in China's dominance in the field, at least in the short term.

  • "This could start a technological evolution in the rare earths industry," said Sun Xiaoqi, lead scientist on the project, according to the South China Morning Post.
  • China accounts for 80% of the global supply of rare earths, according to the U.S. Geological Survey.

Of note: Last week I mentioned that Lynas Corp., one of the most important producers of rare earths outside of China, was eyeing a move to U.S. soil after a fight with the Malaysian government. Malaysian Prime Minister Mahathir Mohamad said Thursday the company's refinery would be allowed to continue operations.

Dion Rabouin