As the world continues to sail through uncharted waters, the economies around the globe are adjusting to the unknown and are adapting to global trading norms. Years of growth were wiped from the major indices in a matter of days and businesses try rapidly to find ways to adapt to a landscape for which we have no map. How has this impacted the wine market? In recent memory, the 2008 financial crisis and the wake of the 2016 Brexit referendum showcased fine wine’s ability to act as a port in a storm where other sectors of the economy are depressed and volatile. Today, fine wine continues to shine through as a beacon of market stability in trying times.
The 2007/08 financial crisis saw the largest economic storm since the great depression, the collapse of the US housing market bubble sent shockwaves throughout the global economy and markets the world over tumbled. Investors were desperately trying to find places to put their funds and mitigate their exposure to the crisis. As ordinarily happens in times such as this, the price of gold soared, rising 31.79% between August 2007 and July 2008. However, what can be seen below is that the Liv-Ex 100 also posted positive gains, but with far lower volatility.
The economic turmoil felt in the aftermath of the 2016 Brexit referendum paints a similar story with volatility found in the domestic markets and a large drop in GBP against both the Euro and US Dollar. The contrasting stability and positive growth found in fine wine is demonstrated in the chart below.
However, the situation we currently find ourselves in is considerably different to the two previously mentioned events. The current pandemic has changed every aspect of life as we know it and the status quo has fundamentally shifted. The wine market is not immune to this, the on trade in particular has felt a seismic shift with a government mandated closure of all pubs, bars and restaurants across the United Kingdom. This abrupt halting of capital to the sector may result in those with large holdings of fine wine turning to the market to lessen their exposure and generate cash for other areas of their business.
Since the start of 2020, tumbling markets have been observed globally. Some have since clawed back losses but remain at their lowest point in years, fine wine however tells a different story with minimal losses posted throughout the pandemic. The table below demonstrates this and underpins the low correlation to conventional markets that fine wine possesses.
Alongside the minimal contraction fine wine has shown in 2020, another facet that makes it a valuable investment is the previously mentioned low volatility in comparison to other markets. This is demonstrated in the chart below.
This performance in the current climate also presents a perfect time for those who do not currently hold fine wine as an investment. Interest rates are low at 0.1% and investors need to be creative in finding a shield to the current climate. Two commodities traditionally deemed as investable are crude oil and gold. The latter is the traditional asset investors turn to in time of economic crisis. However, they have both experienced large movements during the pandemic. Since the start of the year, the price of an ounce of gold has risen 11.50%, and Brent Crude Oil has plummeted from $66.00 to $19.33, a 70.71% loss. This brings Crude Oil’s compound annual growth to -2.60% since December 2003! The volatility seen in both of these commodities means investors should approach with trepidation.
Another facet of the current situation is the creation of investors looking to sell sections of their portfolios in all markets. This is no different with fine wine where sellers may be looking to offload sections of their holdings, possibly to cover losses elsewhere in their investment portfolio, or to raise cash. These distressed sellers are often forced to offer wines below the current UK market price to instigate a quick sale. If buyers are reactive, this presents an excellent opportunity where wines with an instant upside may become available in 2020.
Previously we have posited that the indices from Liv-Ex, whilst a superb marker for the wine market overall, are less representative of the investable wine subset. Historically we have seen carefully selected parcels of fine wine consistently outperform their Liv-Ex counterparts. This is underpinned when looking at the performance of region-specific baskets since the start of 2020 with every region, aside from Bordeaux, posting positive but muted gains. It is noteworthy that of all the regions, the four top performing have been those we earmarked as such for 2020. A full breakdown, rebase and basket component list can be found below.
Recent trends have continued with the Burgundy basket posting the largest gain, 2.57% in 2020 to date. However, it is noteworthy that the basket posted small contractions in January and February. This performance comes as no surprise considering the region’s recent run of form, the Burgundy 150 index from Liv-Ex has posted gains of 77.06% and 159.60% over five and ten-year terms respectively. This staggering growth towers over the FTSE 100 which has moved -12.87% and 3.90% over the same periods, even removing the negative performance of 2020 does little to impact the comparison with the FTSE 100 moving 11.36% and 32.08%. In this instance, the traditional market cannot hold a candle to the growth of investable Burgundy in recent years.
Second in 2020 performance is Italy, moving upwards 1.87 in the rebased plot. The Super Tuscans have performed excellently in recent years with 37.48% and 65.76% growth posted on the Italy 100 index in the past five and ten years. The defiance of the Super Tuscans posting positive growth in the current economic climate is testament to their robustness and suggestive that a balanced investment portfolio should not be without them.
Thirdly, a basket of top champagne has also garnered appreciation in 2020 to date with a rebase rising 1.21. This performance has certainly been buoyed on by the release of the 2008 banner vintage, which was superb across the board. We anticipate a continuation of this growth for the remainder of the year and the region remains one of our investment recommendations for 2020.
The regional basket of wines from the Rhone valley shifted upwards 0.94% in 2020 to date. This is a continuation of recent performance spurred on by the release of three consecutive excellent vintages, the 2015, 2016 and 2017. These superb wines coming to market will inevitably cause an increased interest in back vintages from the region from those looking to buy wines ready to drink now.
Finally, the Bordeaux basket. As predicted in our report at the beginning of the year, Bordeaux on the whole continues to stall. The basket of First Growths has lost 1.31% in 2020 to date, following suit from the performance seen in 2019. However, when taking a holistic look at the current economic climate, the losses found in the region are miniscule compared to those found elsewhere in the investment arena. We believe this proves that even in flatter times for the region, it can still stand shoulder to shoulder with other investments. There are certainly buying opportunities to be had in the region in 2020, but our outlook remains unchanged. Bordeaux buys must be methodical this year and broad buying tactics avoided.
A characteristic fine wine has historically demonstrated is the low correlation it possesses to conventional markets. This is the trait that allows the commodity to shake off downturns and remain stable, or even appreciate, in times of crisis. The correlation the Liv-Ex 100 shows to the FTSE 100 over the course of 2020 can be seen in the table below.
In 2020 to date, both the Italy and Rhone baskets demonstrate a strong negative correlation with the FTSE 100. This is indicative of markets which will tend to move in opposite directions, when a downturn is seen in the FTSE 100, an appreciation will usually be observed in the baskets of Italy or Rhone. Burgundy and Champagne show a weak, but still negative correlation, meaning the movements will likely be in the same direction, but with a less pronounced impact. As we have surmised in previous reports, Bordeaux is the only region to consistently show positive correlation to conventional markets, meaning the market will tend to follow the same directional trend of the FTSE 100.
Fine wine has historically demonstrated below average risk and above average returns when compared with traditional markets. This can be seen in the chart below, plotted in monthly intervals from December 2003 to date, which shows all fine wine indices clustered towards the top left of the plot. This indicates an above average compound annual growth rate on the X axis and a lower than average risk profile (annualised standard deviation) on the Y axis. This underpins the thought that fine wine is an attractive commodity for inclusion in any investment portfolio.
Another consequence of the current pandemic has been the postponement of the 2019 Bordeaux En Primeur campaign. However, the decision has been made to proceed and samples have already been sent to major critics and merchants. We will be tasting the vintage in the coming weeks. We expect the bulk of the campaign to start in earnest in June and run to early July. We will follow with a full En Primeur report, however, the quality of the vintage is unquestionably high. The Chateau owners have spoken about the need to react to market conditions and that Chateau should release at a discount of anything from 10-30% on 2018. If such prices do manifest, we will be strong advocates of the campaign which will present a superb opportunity. Of course, the fear is that while Chateau owners may be verbose about the need for their neighbours to discount, it might be a ‘do as I say, not as I do’ philosophy which would lead to a naïve and arrogant pricing strategy.
The events in 2020 to date have caused a seismic shift across the world with life as we knew it a distant memory. There is pandemonium across many investment markets and unfortunately some investors will have lost a fortune. However, those with capital in fine wine should take solace in the fact that they have chosen a commodity which has repeatedly demonstrated to be an excellent vehicle for times such as these as much as times of prosperity. The above average returns, below average risk and low correlation to conventional markets converge making fine wine a superb tool to weather a storm. The introduction of distressed sellers to the market make 2020 an interesting time for those already invested, those looking to expand or individuals looking to enter the market. Our 2020 outlook holds steady and has been underpinned by performance in the first four months. With the addition of under market purchases from distressed sellers, the wines of Burgundy, Italy, Champagne and the Rhone remain our investment picks for the months ahead.