Is wine a hedge against the economic cycle?
Although wine markets have generally appeared not to correlate with the global economy over the last decade, we would not be surprised if this has changed from 2016 onwards and for the next 5-10 years. Look back in time to the recession of the early 1990s, the Asian Crisis of 1997, the dotcom bust following Y2K, and the Iraqi invasion of Kuwait in 2003; and you will see that all these events that negatively affected global sentiment and equity markets also affected the fine wine market.
Go back further to the oil crisis of the 1970s, and wine plunged then too. But that was a different epoch. Whilst the fine wine market has further globalized and broadened since the mid-2000s, people are still people: with the same human response to economic positives and negatives; that in turn reflects in levels of investment, spending and so on. The fact that this is a discussion at all is down to the banking crisis and what happened in the period 2009-2015. Initially, as stock markets tanked, the wine market rose, then rocketed in line with commodities and safe haven assets such as gold bullion.But it was counter-intuitive. The response of the Bordelais in April 2009 was rational, to cut release prices to levels not seen for several years.
This was largely due to a discontinuous, one-off event, namely China’s rapid industrialization, and what that did to commodity prices. In our opinion, this does not mean that fine wine correlates with commodities. Or gold. As variously has been posited. You could just as easily correlate corruption, grafting and the adoption of fine wine as an alternative store of value for various indirect purposes within China during that period.
Wine is not a commodity. It happens to be one of the most commodity-like luxury collectibles, but that is not the same thing.
Wine is not a safe haven asset like gold bullion. When the world goes south wine warehouses do not fill up. The basic question is whether the wine is a hedge against the economic cycle? Historically it wasn’t. Recently it appeared to be but discontinuities are just that, so it’s not a reliable period upon which to form an opinion. Is the broader base upon which we now sit a game changer, where the laws of supply and demand, and the effect upon that of greater consumption, take over?
Scarcity has relentlessly driven Burgundy and cult Californians to new undreamt-of heights, with top Baroli in hot pursuit. Will relative scarcity do the same for Bordeaux or has the global base broadened at the same time as traditional markets, the USA included, have shrunk? And irrespective of all of the above, will the market continue to punish excessive pricing when things get out of hand?
Wine Investment. Worth It?
Compelling data. A quick look at historical market values for fine wine says a lot. Over the ten years 2008 to 2018, benchmark investment indices (such as the Wine Owners 150) show portfolios of top wines making consistent gains of 12%. This performance compares favorably against the FTSE, S&P 500 and gold, in spite of that 10-year period being disrupted by the worst-ever performance period for red Bordeaux. Scarcity-led wine markets have performed even better. The KFFWI index, which includes some of the world’s rarest and most sought-after wines, demonstrates this perfectly. This index boasts impressive 10-year growth of 192%.
For the private collector or a serious investor, using a wine trading platform, not dissimilar to the Forex platforms, helps to buy and sell wines, but without having to use an agent or a broker. You are essentially cutting out the middleman in the trading negotiations. Sites such as Wine Owners and Cavex are convenient to sell products and make an income with a lower commission from traders. When it comes to the commission, wine merchants will often charge 10%, however, the commission charged by Cavex currently stands at 3%.
A sign of the times. Since 2008, high net worth individuals have been investing ever-increasing proportions of their discretionary wealth in tangible assets. This move towards diversification was stimulated by the banking crisis and rapidly gained momentum. It shows no sign of slowing down. This quote from the FT (October 2014) neatly captures this. “On the final day of the FTSE 100 index of leading UK shares set a record, closing at 6,950.6. Almost fifteen years later, it has still not retaken that level. It’s against this background that interest in passion investments — tangible assets such as art, cars, stamps, wine, and coins — has increased so strongly.” Supply and demand. Scarcity and demand drive collectible investment markets and fine wine fits the bill due to its relative liquidity. A market for passion assets or collectible alternative investment classes becomes especially attractive when supply is limited, demand is globalizing, and authoritative information sources bring transparency to a market. Wine meets all three of those preconditions. Examples of low-production wine regions whose wines most obviously reflect this imbalance are Burgundy and Piedmont. Even in Bordeaux, the largest source by far of investment-grade fine wine, supply is more limited than historically, due to ever-increasing focus on quality over quantity. Higher global demand pushed up prices, which in turn made if financially feasible for Bordeaux chateaux to declassify greater proportions of their top wines, and create better-quality second- and third-tier wines.
The fine wine trade exchanges – the biggest players
For the private collector or a serious investor, using a wine trading platform, not dissimilar to the Forex platforms, helps to buy and sell wines, but without having to use an agent or a broker. The following exchanges currently dominate the fine wine trading market. Each of them has benefits and limitations.
Cavex, Liv-Ex & BBX
Another platform, CWEX, aims at establishing simple and accessible fine wine exchange to enable cryptocurrency holders to trade with real-world assets in a global market. The platform establishes advanced trading channels for cryptocurrency owners on one end, and on another opens a new market for fine wine producers.
The data from Liv-Ex shows a significant increase in fine wine trading in the secondary market. Over the past year, more than 4,500 different wines from 769 brands were traded. This was somewhat higher, compared to the 4,000 wines from 670 brands traded the year before. According to Liv-Ex, there has been a 90% increase in the number of brands trading on their exchange since 2015, expecting the trend to continually broaden during 2018 (as increasing numbers of merchants trade increasing quantities of wines)5. Although the wine market has been growing over the past few years there are still a number of obstacles in expansion and advancement, particularly heavy taxation and legal regulations imposed by governments.
