Investing in Wine - February 2012
Fine wine prices fell by 15 per cent in 2011 as the market corrected from the sharp rises of 76 per cent since the end of 2008, and some stockholders took profits and returned to cash given the uncertain economic conditions in the eurozone.
Nevertheless, wine is still proven to be an excellent longer term investment, with prices over five years rising by 66 per cent compared with 0.9 per cent on the FTSE 100.
Looking forward, the only two previous bear markets for fine wine in the past 25 years (1998 and 2008) saw the market hit a low point in December and recover sharply the following year.
With technical analysis also pointing to wine having been oversold, this could be the most advantageous time to buy into the market since January 2009.
Falls such as those in 2011 are extremely rare in the fine wine market and have generally been followed by strong returns for those investing at the right time.
Movements in fine wine prices tend to be uncorrelated with those for other assets such as equities, with the exception of periods of extreme stress in the financial system.
Since 1988, when reliable wine price records began, 1998, 2008 and 2011 are the only years that prices fell significantly in a calendar year. These were closely linked to systemic financial difficulties: in 1998, the Asian financial crisis and the collapse of the American hedge fund Long-Term Capital Management; in 2008, the banking/credit crisis and the collapse of Lehman Brothers; and in 2011, the eurozone crisis and the possibility of a European government debt default.
Analysis from Liv-ex, the fine wine exchange, also points to the possibility that the market is close to a low point. Liv-ex estimated ‘support’ and ‘resistance’ lines for its main index, the Liv-ex 100, which are used by analysts to predict market turning points.
Such ‘technical analysis’ should always be treated with scepticism, but if it has any value then the market may be very close to the bottom.
Downside risk to the market comes from the possibility of a failure of the eurozone stabilisation plans or a significant slowing down of the Chinese economy. That said, fine wine has two advantages over other assets.
First, it remains a consumable good that people will, at some price, buy to drink. And second, this very quality – the fact that it is a physical commodity, immune from inflation and government debasement – means it is attractive to investors as a store of value in uncertain times.
The possibility of stronger than predicted growth comes from continued demand from China, which is now a large enough market such that even growth at relatively modest levels can impact prices, particularly if the Chinese currency strengthens as well.
The return of Japan to the market following the devastation wrought by the 2011 earthquake and tsunami is also an important factor, as is the possibility of positive net investment inflows, given the more attractive valuations.
Looking at the worst-case scenario, it is hard to imagine further price falls of more than 5 per cent, while increases of more than 15 per cent are easily conceivable. That balance of risks will look attractive to many investors.
Andrew della Casa is director at The Wine Investment Fund