Smart Investing: Inflation and Fine Wine

Luxury items are, of course, not necessities. Therefore, as inflation continues to rise, it would seem natural to assume the performance of luxury goods would decline. Yet the opposite in fact rings true: with increasing inflation rates, more and more individuals are opting for luxury goods. As a result, leading companies such as LVMH reported remarkable growth of 23% in their Q1 2022 earnings.

Fine wine should be considered both an investment and a luxury item, its tangible nature and limited availability contributing to its continued success in markets affected by inflation or uncertainty. And of course, with its very active secondary market, there are many opportunities to capitalise on the value of your purchase.

Since the beginning of 2022 in fact, the Liv-ex 100 grew by 7,91%, and by 22.2% year on year. The Liv-ex 1000, the broader index, did even better; + 8.62% from the beginning of the year, and + 25.6% between May 2021 and May 2022. Even looking more regional, the numbers are compelling; the Italy 100 sub-index for example, which grew by + 7.62% in 2022, and + 274,69% total gain, stands strong against the overall Liv-Ex 100 performance.

Numbers like these demonstrate the wine market as a niche one – one that follows its own logic and is disconnected from the current world events. The following chart demonstrates just this. Comparing the performance of the Liv-ex Fine Wine 100 to CPI, FTSE100 and HPI illustrates how the wine indices follow a similar growth vector to that of CPI and HPI while staying ahead of the curve.

While gold has also outpaced inflation since 2004, it came with a noticeably higher degree of volatility than fine wine. The Liv-ex 1000 experienced a 4,86% annualised volatility through the end of 2022, well below gold’s 16,93% over the same period.

As such wine performs at comparable levels with gold but at a much more stable rate risk-wise.

This stability is important; fine wine has been more likely to maintain its upward trajectory during different market environments – including rising inflation – compared to gold. Even if wine prices do not always spike every time inflation leaps higher, they offer a reliable track record of positive real returns.

Gold is widely seen as a safe-haven asset during economic downturns and financial market selloffs such as the current volatility. That being said, the general direction of the broader market can have a more direct impact on gold prices. For example, gold’s lackluster performance in 2021 can be partially attributed to the soaring equity markets. Many investors had been pouring their money into stocks, rather than diversifying in gold amid rising inflation. Fine wine generally holds greater immunity during these periods.

In order to understand why wine prices are on the rise, it’s important to consider internal factors such as supply/demand, wine quality and brand prestige.

Fine wine’s investment potential largely stems from its rarity. The supply is constrained, which helps prop up prices despite the weakening of hard currency by inflation.

Fine wine is an attractive option for diversifying your portfolio. It can help protect against inflation and may result in impressive returns over time. Moreover, this asset appreciates upon maturing, making it even more desirable for investors. The global centre of the fine wine market, Liv-ex, has exploded in popularity since its launch over two decades ago, rocketing up by an incredible 339.3%.

Despite the unstable economic landscape of the past decade, fine wine has remained a secure investment due to its robustness. This can be seen in how it wasn’t as severely impacted by events such as the 2008 financial crash or 2020’s COVID-19 pandemic. With more uncertainty on the horizon, and continued demand outstripping supply, investing in fine wine during periods of swelling inflation is certainly a hedge to consider. Its track record speaks for itself.