A time to hedge one’s bets?

We were very interested to see this headline over the weekend: “Hedge funds pile up record bets against sterling”. Without going too deeply into the arguments, these denizens of Mayfair seem to think that the economy is going to struggle post Brexit and that interest rates are due to stay low for some time. As it happens, at Amphora Portfolio Management we think that anyone who chooses to put his head on the economic forecasting block needs to have it examined, but that is by the by. If they are right, and sterling remains under pressure, then all the recent evidence points to further upside in fine wine prices.

The reason we think this is likely to last longer than many people currently believe is captured in another helpful headline: “Investors bullish on growth.” In a nutshell, around the world cyclical stocks (which perform best at times of good economic growth) have outperformed defensive stocks (those that do best at times of economic slowdown) for consecutive months for the first time since 2012. This is leading traders to believe that positions based on gloomier forecasts for world growth, of which there have been plenty, are being unwound in the face of improving economic numbers.

So if sterling isn’t going up in a hurry and foreign economies are doing fine, increasingly wealthy international investors will continue to be on the lookout for sterling-based bargains. All highly propitious by way of backdrop for rising fine wine prices. But which ones in particular?

Can something, at last, be stirring in the house of Ausone? High tides float all boats, as they say, so it would be very unusual if the current frenzy were to have no impact on this most out-of-favour producer. Now is not the time to rehearse Ausone’s many qualities, as we did that as recently as June, but as with all names during this, and any, rally, vintages do not march ahead in uniform fashion. Some fine wine investors may be surprised to hear that any vintage of Ausone has perked up, so long has been their slumber, but the 2010 is up over 50% since the referendum, the 2001 over 30%, the 2013 over 20%, and so on.

The 2010 merits 98+ from Robert Parker, and enjoys exactly the same score as the 2009. You’ve heard me ask this question before haven’t you? Check out this chart:

That somnolent red line across the middle is the 2009. Its Liv-ex market price is £8,800. That altogether perkier light blue line near the top? Yep, the 2010, checking in currently at £12,674. What, ladies and gentlemen, are you waiting for?

I should also point out from this chart that the green line which seems to have been given a touch of defibrillation is the 100 point-scoring 2005. To a somewhat lesser degree the lonely chap at the bottom is also registering something in the way of heartbeat, and indeed it is also a perfect 100 pointer. I know that there are those who decry the 2003 vintage as not an “on vintage” at all, and the St Emilion overall vintage scores are way higher in 2005 than 2003 (99 to 90), but the reason the vintage score was low in 2003 was the extreme heat and lack of rainfall from June to August. As luck would have it this didn’t negatively affect Ausone whose terroir is very limestone rich, acting as a perfect foil to the temperatures and drought. Bottom line? The 2003 is still way too cheap.

Briefly staying with Ausone, the off-vintages of 2001, 2006 and 2008 all used to score 98 points. The 2001 and the 2008 still do, but the 2006 was reduced earlier this year to a mere 93.

If you could short the fine wine market the 2006 would be a prime candidate, but since you can’t the obvious thing to do is buy the 2008. 2008 has a better vintage score than 2001 (92 to 90), so answers on a postcard please if you can tell us why the 2001 merits a 25% premium.

Talking of 2006, one wine not too short is L’Eglise Clinet 2006.

The extent of the 2006 bargain is slightly distorted in this chart by the 1998, which serves also to highlight the value resident in the 2008. We have noticed this 1998/2008 anomaly before, and it is visible here too. In short, 1998 and 2008 share very similar characteristics in Pomerol, and both have a high vintage score of 96, very high for an “off vintage”. The 1998 individually scores 96 points, equivalent to the 2006 and 2012, but those latter vintages are slightly inferior (90 and 92 points respectively).

The 2008 scores “only” 95 points, but this raises the question: what value is a single point? Well elusive as that answer might be, we can tell you it is most assuredly not £1,450, which is the difference in market value between the 1998 and the 2008. Buy L’Eglise Clinet 2008.

Which brings us back to the 2006. The question now might be: ‘what value two vintage points?’ Using the Amphora proprietary algorithm which looks at relative value in the fine wine market through the prism of a series of weighted variables, of which vintage score is one, we would argue that all other things being equal, vintage score will affect relative value, but to do so to a meaningful degree the difference has to be more marked than 92 to 90.

In the case of the 2006 and the 2012, we would argue that the greater age, and therefore lower resulting availability, of the 2006, should offset the difference in vintage score. However we choose to view it, we can’t justify the 2012 trading at a premium of 60% over the 2006. Buy L’Eglise Clinet 2006.

Philip Staveley is head of research at Amphora Portfolio Management. After a career in the City running emerging markets businesses for such investment banks as Merrill Lynch and Deutsche Bank he now heads up the fine wine investment research proposition at Amphora Portfolio Management