Fine wine investment: Sitting tight
Understandably enough we’ve had a lot of queries recently about how resilient we might expect fine wine prices to be in the current investment environment.
We have watched with great interest as the gold price has risen strongly over the last eight months in response to what has seemed an irreversible series of uncertainties, whether it be Brexit, geo-politics, trade and tariff talks, and now, of course, coronavirus.
By extension clients have gone on to query the outperformance of gold against fine wine in these circumstances. At times of uncertainty, we are given to understand, investors seek comfort in physical assets. Fine wine is a physical asset like gold, yet its prices have lagged substantially over the last year. The Liv-ex 1000 is down 4% against a rise of 25% in 12 months for gold.
We would argue, however, that all things have not exactly been equal over the last few months. The fine wine market has been hit by a triple whammy which is quite unusual as we shall explain. Any global market place has a variety of customers, by definition. In the case of fine wine the majority of buyers come from Hong Kong and China, the US, and the UK.
We noticed some months ago that buying from the Far East had softened significantly, as the unrest in Hong Kong started to neutralise the former colony’s ability to act as an entrepot particularly to China. Over much the same time the Brexit uncertainty in the UK saw activity reduce locally, while the imposition of tariffs on French wines by the US administration did for a lot of the buying from there.
When you consider these factors in aggregate it is remarkable that the fine wine market has stood up as well as it has. If you throw in the perfectly reasonable profit-taking in the Burgundy sector it gives some impression of the heavy lifting the other sectors have had to do. And now we have coronavirus putting a further dent in proceedings.
When a market place is young, as in the case with fine wines, there will tend to be a fair number of inconsistencies, and Amphora clients know that we spend a great deal of time examining the inefficiencies of pricing that arise from this, with a view to taking advantage and enhancing investment returns. It is always comforting to know though that there is a seam of logic running through the market place as a whole, or else price differentials would never be arbitraged away.
What we would have expected over the last year, in the face of the above slings and arrows, would be outperformance of non-French wines, and a broadening of interest in wines from Burgundy, and it is comforting to see that this is exactly how the market is playing out. As of this moment it is difficult to see any reason to change this approach unless you have a particular view of how the coronavirus outbreak will evolve. Why?
A professional investor has no time for emotion, and spends most of his/her time looking for ways to make money. To that extent what has happened over the last couple of months will have given rise to this key question: has the correction in equity prices given us a fantastic buying opportunity? This is not the place to explore that question, it is merely sufficient to know that it exists. Evidence of the practical effects of that fact can be found in the rebounds we see in equity prices from time to time during the current phase.
So how does this all affect the fine wine market? To our way of thinking the market is very largely consistent as to how it prices its very wide variety of wines. It exhibits the sort of logical response to external influences such as those noted above (e.g. the outperformance of Italian wines). Hence its relative resilience over the last year is either exhibitive of paralysis, or underlying strength. To help determine which it may be instructive to ask these questions: what would happen to prices if we were to remove any or all of the three key obstacles? Can we look beyond coronavirus? These are the questions a professional investor would be asking.
As to the latter, you pays your money and you takes your choice. It is either ‘different this time’, or the effects will be as limited as those pertinent to earlier epidemics like SARS and MERS. At this point no-one has a clue. As to the former, although we cannot know if and when the US tariffs on French wines will be removed, we believe that US interest in fine wine is unabated, and has simply shifted elsewhere in the market. In so far as this helps broaden the market it is a good thing.
The Asian buyers are a slightly different matter. Chinese wealth and passion for fine wine have helped determine the fortunes of the fine wine market for some years now. To a great extent Chinese buyers have required Hong Kong intermediaries to help them access the world’s finest wines, so the combination of the political unrest in Hong Kong and the questions posed of Chinese economic growth by coronavirus have applied a considerably brake to proceedings. Both questions are still in the air so we should expect no great support from the market from Asia for the time being.
Whether we believe the Brexit uncertainty is resolved or not is currently of marginal importance given the unknowns elsewhere. We are reassured by the resilience of the market over the last year, and are confident of rising prices once some of the current anxieties abate. Until then we would just continue to sit tight.
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 with Amphora.