Although annus horribilis, a Latin phrase meaning ‘horrible year’, has reportedly been wielded since 1985, it did not achieve prominence until 1992, when Queen Elizabeth II used it as an allusion to what had befallen her imperial household during that fateful year. To observers and practitioners of the Hong Kong jewellery industry, 2014 has not been quite as damning. But it certainly has been a disappointing year as sales, employment and profits have all gone downhill as the year progresses. Some may even be tempted to describe the outgoing year and for that matter, the incoming one as staring in the face of a ‘perfect storm’, meaning ‘a particularly bad or critical state of affairs arising from a number of negative and unpredictable factors’.
Disappointing, real disappointing
First of all, how bad or ominous did things get? At the time of writing – end-November – data was available in most cases only up until September. It should be noted forthwith that in the first nine months of 2014, the retail sales of ‘jewellery, watches and clocks, and valuable gifts’ slumped 14.7 percent by value and 12.6 percent by volume, when compared with the same year-ago period. On a three-month-moving-average (3mma) basis, both value and volume had fallen for six months running by August, though some consolation could perhaps be taken from the moderating pace of decline – from high double digits to nearer single digits.
Even as jewellery sales at home give cause for concern, shipments abroad fail to assure. In the nine months that ended September, the value of domestic exports fell 9.2 percent year-on-year (yoy), widening from a 4.8 percent decline in the corresponding 2013 period. Similarly measured, re-exports scraped a 1.9 percent gain – a far cry from the 7.9 percent advance posted in the same year-ago period. As a result, total exports only eked out a 0.2 percent rise, whereas the same 2013 period registered a 5.8 percent increase. Most worryingly, domestic exports had dropped in 3mma, yoy terms for 14 months in a row by August.
A discouraging macroeconomic backdrop
Against this setting, local jewellers can be forgiven for feeling angst-ridden and despondent. Not a few of them may wish that 2014 had never occurred or, given that it indubitably is with us, they would rather forget all about it and turn over a new leaf as 2015 approaches. The rub is that as Luca Solca, a luxury analyst at Exane BNP Paribas, observed: “There seems to be a perfect storm closing in on the luxury goods sector.” Fine jewellery, worth about 150 billion euros per annum worldwide, is – alas – part and parcel of the sector.
We invoke not the term ‘perfect storm’ here without rhyme or reason. For one thing – and to begin with the big picture – the “serial disappointment” of the global economy has continued for as long as one can remember – and with little or no abatement. The Anglo-speaking economies of the United States and, to a lesser degree, the United Kingdom have been oases of relative prosperity. This is not to suggest in any way, shape or form that they have been going like gangbusters – just that in what is nigh on a reverse beauty contest, they are arguably the least ugly.
Notably, going forward, the US economy, the annualised growth rate of whose real gross domestic product (GDP) in the third quarter has just been revised upwards to an awe-inspiring 3.9 percent (from an already respectable 3.5 percent previously), risks being weighed down by weakness outside of America. As a recent New York Times editorial observes, the weakness is global but it is America’s problem as non-US economic lethargy, along with a soaring greenback, undermines the exports of US goods and services to the rest of the world. Meanwhile, on current indications, China – the second-largest economy after the United States – has shifted to a lower growth path pivoting around 7 percent from the redoubtable 10 percent-plus trajectory along which it has traversed for decades.
As if those were not enough, Japan – the third-placed economy worldwide – slid back into recession between July and September as its real GDP fell for two consecutive quarters on the back of an April increase in the country’s goods and services tax from 5 percent to 8 percent even as wages and salaries were still becalmed. In the meantime, its quixotic quest to part company with prolonged deflation once and for all is fraught with difficulty as disinflation (from an already anaemic inflation rate) appears to be staging a comeback. To complete the picture, Europe has also been flirting with deflation, double-digit unemployment and recession.
Perfect storm closing in
With exceptions few and far between, the world economy appears to have been afflicted with what Lawrence Summers, the world-renowned economist, has referred to as “secular stagnation”. In March, moreover, the prospects for the jewellery industry – both in and outside of Hong Kong – were further clouded by Russia’s annexation of Crimea and the problems in Ukraine, leading to tension and political wrangling with Europe and the United States. This happened even as China’s austerity drive championed by Zhongnanhai and no less than president Xi Jinping himself remained rip-roaring. Beijing’s suppression of extravagance by mainland officials has continued longer and expanded wider than most everybody thought – and has exacted a heavy toll on luxury goods in general, fine jewellery included.
The significance of all this cannot be exaggerated. Chinese consumers now constitute the single largest market for personal luxury products, accounting for a formidable 29 percent of the world total. And HK’s great ascent stems primarily from its role as the must-stop shopping Mecca for their mainland Chinese compatriots. Thus, when the as-yet ongoing ‘Occupy Movement’ swung into action in late September, the local jewellery industry was challenged by another tumultuous and potentially debilitating development. Granted, HK’s economy in the third quarter fared better than anticipated, with real GDP up 2.7 percent yoy, up from 1.8 percent in the April-June period. Yet, anecdotal evidence suggested that at least in October, sales in the jewellery outfits that were situated in Yau Ma Tei, Tsim Sha Tsui and Mong Kok – one of movement’s three principal locales – suffered a precipitous decline.
Not all is lost
The foregoing having been said, it should be noted that according to just-released figures, visitor arrivals from north of the border actually soared 18.3 percent yoy in October. With overall tourist arrivals up about 12 percent, this suggests that visitor arrivals from elsewhere in the world decreased slightly: while the movement is essentially peaceful, it is indeed marred by intermittent riots; possibly due to negative media coverage abroad of the movement, not every foreigner has a proper perspective of what has been transpiring. However, mainland visitations have not been as much affected as Chinese tours and participants of the Individual Visit Scheme can avoid the ‘occupied’ areas, opting to frequent areas along the Hong Kong’s railway, such as Sheung Shui, Shatin and Taipo.
Moreover, casting our eyes further afield, we would have noticed that in recent months, there are some potentially momentous policy developments afoot. For the major economies of the world, it would seem that the Rubicon has been crossed and there is no turning back. Each and every one of them is striving to keep deflationary stagnation or recession – whether it be cyclical or secular – at bay. Thus, even though the Federal Reserve since end-October terminated its bond-buying operations, otherwise known as quantitative easing (QE), the US central bank is sticking to its policy of low or near-zero short-term interest rates for as long as inflation continues to undershoot its unofficial inflation target of circa 2 percent – notwithstanding the swift decline in unemployment.
As well, late November saw its Chinese counterpart – the People’s Bank of China (PBoC) – cut interest rates for the first time in more than two years. One hastens to add that this was after the PBoC had relented its monetary stance with moves targeted at the shrivelling housing market and the cash-starved small and medium enterprises. In effect, the PBoC has been conducting some form of QE with little fanfare. Across the seas, Governor Haruhiko Kuroda virtually doubled in October the scale of the Bank of Japan’s QE, expressed resoluteness in defending his dramatic policy move and vowed to do even more if need be. And, finally, it looks as though the European Central Bank is poised to make good on its oft-repeated pledge to do whatever is necessary to revive the euro project by, first and foremost, staving off deflation and recession.
QE of one variant or another is conducive, in the first place, to rising asset prices and a positive wealth effect which will then filter through into the real economy, albeit with uncertain and undefinable time lags. Notwithstanding current difficulties, there is ground for cautious optimism about the medium-term outlook for watches and jewellery, particularly as the numbers of affluent individuals are still rising. To wit, those with at least US$1 million of investable assets, excluding their principal dwellings, grew by 2 million in 2013 to 14 million. In Asia, the number soared 17.3 percent to be neck and neck with North America. There is even some preliminary indication that the drop in Chinese sales may be bottoming out. In addition, the total wealth of high-net-worth individuals rose 14 percent last year, reaching US$52.6 trillion. Therefore, despair not, folks, despair not: there may be light at the end of the tunnel – and sooner than you think to boot. Amen! (Photo courtesy: Treasure Auctioneer)
By Peter Ip
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