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What it means for Swatch Group to leave the SMI

The Swiss watchmaker has been squeezed by competition from the tech and luxury sectors, which gained phenomenal traction. Yesterday’s innovators are often today’s laggards.

Myret Zaki
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Swatch Group will leave the Swiss blue chip index SMI this fall and join the mid-cap category. One can consider this event as insignificant. Or realize how the composition of an index reveals what investors value most at a given point, i.e. what economic paradigm is at play.

For instance, after 2008, Swiss banks have undergone a downward revaluation that reflected deep shifts in finance towards fintech and a new regulatory paradigm. In 2003, four companies weighed as much as 70% of the Swiss Market Index: Nestlé, Novartis, Roche and UBS. Food, pharma and banks were at their peak. Today, almost two decades later, the same four blue chips weigh 57%, but the first three kept their weight. Only UBS’s market cap was divided in half, from CHF 100 bn at that time to CHF 53 bn today.

Swatch Group has seen a similar pattern of downward revaluation. Its market cap was divided by two between its 2013 peak at CHF 30 bn, and today’s CHF 16 bn, which makes it smaller than the company replacing it in the SMI, Logitech.

Swatch Group’s 18-brand portfolio including Omega, Longines, Tissot or Breguet has created less value during the last decade. 2013 was the year when the China-driven watchmakers euphoria subsided, after a period of growth that had seen the value of Swiss watch exports to China multiplied by 100 over 12 years. China’s phenomenal growth was normalizing, and a new anti-corruption law cooled down the demand for Swiss watches.

The winner takes it all

In 2015, Swatch Group was challenged by disruptive wrist invaders, in particular the launch of the Apple Watch. The Swiss group decided not to jump on the tech wagon. Its CEO Nick Hayek dismissed Apple’s smartwatch as «an interesting toy». The Biel based company opted for the creation of simpler devices with a battery lasting reasonably long, but wasn’t going to compete head-on with Apple. Technological watches are not really watches but connected devices with completely different systems, uses, parameters and practices. It became clear that the know-how was of a very different kind. Leading this space after revolutionizing everyone’s life with smartphones, Apple was the natural first mover.

In the same period when Swatch Group peaked, Apple saw a massive upward revaluation, as its share price was multiplied by ten since 2013. The Californian group has become a $ 2400 bn market cap behemoth, attracting every investor’s money, from US mutual funds to Swiss family offices. Even the Swiss national bank has allocated oversized amounts to the stock.

The tech boom was irresistible, and all the rest became old-fashioned. Today, Apple is worth 151 times Swatch Group on the stock market. Owing to its first-mover advantage, the Apple Watch sold in even bigger numbers than the total volume of Swiss watches in 2019. Apple took a third of the market share of Swiss quartz watches in the segment below CHF 500, and a fifth of the market under CHF 1200.

US tech is so much at the core of today’s lifestyle that this sector captured even most of European investor’s money, at the expense of Europe’s and Switzerland’s stock markets. Europe – including Germany – has hardly any tech giants that profit from the Covid accelerated digitalization. As a result, the combined market cap of all German 30 Dax blue chips is now more or less € 1250 bn, which is lower than that of Apple or Microsoft alone, and on par with Amazon.

Switzerland, with its industry-heavy companies, is bound to lag. It wasn’t always that way. In 1982, Swatch Group was the breakthrough innovator, the «Apple» of the Swiss watch sector, pushing it to the next level by launching the Swatch quartz watch, created by its ETA factory, and achieving a spectacular turnaround in the battered sector.

Besides the tech secular revaluation of this decade, and the huge tilt towards US stocks, luxury has also been a «bestseller» on the stock market for some time, which has greatly benefited pure players such as France’s LVMH and Geneva’s Richemont. That was also a challenge for Swatch Group. Its 2020 net loss came after a decade of medium growth, while in contrast, LVMH (Louis Vuitton, Dior, Givenchy, Guerlain) and Richemont (Cartier, Van Cleef & Arpels, Baume & Mercier, Ralph Lauren) were more profitable and their shares performed better. Richemont, an SMI member, is worth CHF 58 bn in market cap, almost 4 times Swatch Group, while LVMH is a CAC 40 star with € 336 bn in value.

While its Omega brand, partner of James Bond and of the Olympics, remains strong and successful including in China, Swatch Group is no longer the number one Swiss player in terms of market share since 2020. The Rolex group, including the Tudor brand, is now the first player in terms of global market share, according to statistics of Swiss watch exports provided by a Morgan Stanley report released in March.

In this winner-takes-it-all context, betting on mass tech or luxury for millionaires has been richly rewarded. Playing the globalisation game to the fullest and grabbing first-mover advantage paid off as well, but these strategies are going to get tougher for everyone in the next decade. Still, the tech sector is bound to continue to warrant a premium over more traditional industries, because of its transformative power over people’s lives and future. The future looks even brighter for top luxury brands as the number of billionaires has never been higher.

As to Swatch Group, not being listed in the Swiss blue chip index will make it harder for the group to reach global investors. Fortunately, there is life outside the tech and luxury star-systems, and there is always a safe spot for quality, established names and long-term defensive plays.

Myret Zaki

Myret Zaki started in 1997 as a junior analyst in a Geneva private bank where she learnt the basics of equity research, before joining the daily newspaper «Le Temps» in 2001, where she was in charge of the finance section for 9 years. When the financial crisis broke in 2008, she wrote the investigative book «UBS, am Rande des Abgrunds» (originally published in French as «UBS, les dessous d'un scandale»), for which she received the Schweizer Journalist prize. She joined «Bilan» magazine in 2010 where she became Chief Editor from 2014 to 2019. Between 2010 and 2016, she wrote three other bestselling books, about Swiss banking secrecy, the end of the Dollar reserve status, and the rise of the shadow banking system. She has a Political Science Bachelor from the American University in Cairo and an MBA from the Business School of Lausanne. She is now head of the Communication faculty at the School of Journalism and Media in Lausanne.
Myret Zaki started in 1997 as a junior analyst in a Geneva private bank where she learnt the basics of equity research, before joining the daily newspaper «Le Temps» in 2001, where she was in charge of the finance section for 9 years. When the financial crisis broke in 2008, she wrote the investigative book «UBS, am Rande des Abgrunds» (originally published in French as «UBS, les dessous d'un scandale»), for which she received the Schweizer Journalist prize. She joined «Bilan» magazine in 2010 where she became Chief Editor from 2014 to 2019. Between 2010 and 2016, she wrote three other bestselling books, about Swiss banking secrecy, the end of the Dollar reserve status, and the rise of the shadow banking system. She has a Political Science Bachelor from the American University in Cairo and an MBA from the Business School of Lausanne. She is now head of the Communication faculty at the School of Journalism and Media in Lausanne.