Fine wine investment: Underlying strengths
Fine Wine investment advisers often talk about the asynchronicity of the fine wine market with other mainstream markets, and this year has certainly borne this out.
One of the things professional investors do is assess potential return against perceived risk, and one of the key risk factors in this analysis is volatility. The measure of volatility is so important that you can even trade it as an entity in itself, on the Chicago Board Options Exchange (the largest US options exchange). It is known as the VIX.
It therefore makes an interesting study to see how markets have compared for volatility in this most turbulent of years, but to make life a bit harder for fine wine let’s add one or two further ‘curveballs’.
Firstly, let’s add Brexit, because of its impact on Sterling. The fine wine market is denominated in Sterling so its movements for international investors are important, and it’s fair to say that the currency has been under pressure. It is trading at multi-year lows against the Euro and the US Dollar, and although it has firmed up against the latter in recent months that is more a reflection of broader weakness in the Dollar than integral Sterling strength. This persistent Sterling weakness has weighed on the fine wine market.
As we highlight below, there has been significant disruption to demand for fine wine from Asia over the last 18 months, and if you remove a key plinth from any edifice it will struggle to self-sustain. While we are about it, let’s throw in the 25% tariff President Trump lobbed like a grenade into demand from the US for most top French wines. Two key plinths compromised, then, so has the House of Fine Wine tumbled to the floor?
Before we reach a conclusion let’s put the above into some chronological perspective, because the last five years have witnessed an interesting ride in the fine wine market.
The rally inspired by the depreciation in Sterling consequent on the Brexit vote* (see below) stalled as we entered 2019 as a result in no small part of the disturbances to everyday life in Hong Kong. Asia has for over a decade been an integral part of the landscape whenever fine wine prices have been discussed, and Hong Kong has been the channel through which much of the wine consumed in China has entered the country.
This has not always been beneficial, because in the escalating rise in the market up to June 2011 many prices were ramped by speculative activity centred in the former Crown Colony, the subsequent correction being an almost inevitable result. Notwithstanding, the clampdown on the democracy movement and subsequent riots and clashes between protesters and the authorities saw many market participants run for cover, leading to a tapering off of prices in H1 2019.
As you can see from the chart below, prices had found a level and had started to rise again when the Covid pandemic raised its ugly head. In the face of the prevailing uncertainty only the gold price rose as equity markets around the world entered a (mercifully brief) bear phase.
Many people regard gold as a safe haven in times of investment adversity. Some people think that fine wine, in so far as it is also a physical asset, operates in a similar way. The difficulty with this simplistic view is that fine wine is also a luxury good, with prices rising in times of economic expansion, as people quite simply have more money to spend.
At Amphora we believe that fine wine has an enviably unique investment dynamic but over the short term prices will be affected to some degree by economic contraction. This is an endlessly debated topic: on the one hand, the consumers of fine wine are still wealthy enough to buy it even when their net worth contracts; on the other, as in the housing market, unless there is stability at the base of the pyramid then prices at the upper echelon can become fragile.
Once equity markets had stabilised and started to recover, fine wine prices rebounded off their own April low point, and have risen steadily since then. The decline in the Liv-ex 1000 index terms had been around 6.5%, marked over the period by a lack of volume, in other words, a disinclination to sell.
The last five year period had initially been characterised by significant outperformance in Burgundy prices, but over the last 24 months profit-taking has set in and leadership of the market has been passed to Italy and Champagne. Champagne is a very difficult sector to succeed with, unless you have a portfolio large enough to own most index constituents.
Asset prices are determined by supply and demand, and if supply is seriously limited as in the case of Burgundy where wines can become collectors’ items then price movements can be stratospheric. Such is seldom the case with Champagne yet it doesn’t stop prices marching ahead in many instances. Since Champagne prices march to a beat all of their own we tend to observe an ‘all in’ or ‘all out’ approach to the index constituents.
The perennial question revolves around Bordeaux. In index terms this traditional sector has been an under-performer in recent times, but it has many benefits not shared by other sectors. It is by far the most liquid part of the market, and its ‘behaviours’ are much more regular. In other words, if you find something which is trading at the wrong price you can be reasonably sure it will not trade at the wrong price for long.
To return to the point made earlier, if volatility is a perceived risk (can also be an opportunity, obviously, over the appropriate time frame), it is clear that the fine wine market scores highly for stability. This is not a volatile environment, in investment terms.
In light of the above we think it fair to suggest that fine wine prices have had every excuse for taking a beating over the last couple of years, yet as we can see from this five year view of the Liv-ex 1000, the index has given back a mere 1% over those last unsettling 24 months. Since it hasn’t cracked over that period we believe it deserves a place as part of the bedrock of a diversified investment portfolio.
*This is not inconsistent with the opening remarks on the longer-term weakness in Sterling. If something happens which suddenly makes goods cheaper, more people will buy them. If that something persists it has to be factored into the equation as more of a medium term feature, rather than a one-off event, and colours the conclusions accordingly.
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.