Quite naturally, we’ve had a lot of questions recently about how much resistance we might expect from fine wine prices in the current investment environment.
We have watched with great interest the sharp rise in the price of gold over the past eight months in response to what appeared to be a series of irreversible uncertainties, be it Brexit, geopolitics, negotiations. trade and tariffs, and now, of course, coronavirus.
By extension, clients have questioned the outperformance of gold over good wine under these circumstances. In uncertain times, we are told, investors seek comfort in physical assets. Good wine is a physical asset like gold, but its prices have fallen dramatically over the past year. The Liv-ex 1000 is down 4% against a 25% rise in 12 months for gold.
We would say, however, that not all things have been exactly equal over the past few months. The fine wine market has been hit by a triple whammy, which is quite unusual as we will explain. Any global market has a variety of customers, by definition. In the case of fine wines, the majority of buyers come from Hong Kong and China, the United States and the United Kingdom.
We noticed a few months ago that purchases from the Far East had eased considerably, as the unrest in Hong Kong began to neutralize the former colony’s ability to act as a warehouse, especially towards China. At around the same time, uncertainty over Brexit in the UK led to a decline in activity at the local level, while the imposition of tariffs on French wines by the US administration helped much of the shopping from there.
When you consider these factors together, it is remarkable that the fine wine market has performed as well as it has. If you add the perfectly reasonable profit taking of the Burgundy sector, that gives an idea of the heavy load that the other sectors had to make. And now we have the coronavirus putting a further dent in the process.
When a marketplace is young, as is the case with great wines, there will usually be quite a bit of inconsistency, and Amphora customers know that we spend a lot of time looking at pricing inefficiencies that result, with a view to leverage and improve returns on investment. However, it is always heartwarming to know that there is some logical logic running through the market as a whole, otherwise the price differentials would never be arbitrated.
What we would have expected over the past year, in the face of the fronds and arrows above, would be an outperformance of non-French wines, and a widening of interest in Burgundy wines, and it is heartwarming to see that this is exactly how the market plays out. At the moment, it is difficult to see any reason to change this approach unless you have a particular view of the evolution of the coronavirus epidemic. Why?
A professional investor doesn’t have time for emotion and spends most of his time looking for ways to make money. To that extent, what has happened over the past two months will have raised this key question: Has the correction in stock prices given us a fantastic buying opportunity? This is not the place to explore this question, it is enough just to know that it exists. Evidence of the practical effects of this fact can be found in the rebounds that we see in stock prices from time to time during the current phase.
So how does all of this affect the fine wine market? In our opinion, the market is very broadly consistent when it comes to pricing its very wide variety of wines. It presents the kind of logical response to external influences such as those mentioned above (eg the outperformance of Italian wines). Therefore, its relative resilience over the past year is either indicative of paralysis or an underlying one. To help determine which ones it may be instructive to ask these questions: What would happen to prices if we removed some or all of the top three barriers? Can we look beyond the coronavirus? These are the questions a professional investor would ask.
As for the latter, you pay your money and you make your choice. It’s either “different this time” or the effects will be as small as those relevant to previous outbreaks like SARS and MERS. At this point, no one has a clue. As for the first, although we cannot know if and when American tariffs on French wines will be removed, we believe that the United States’ interest in fine wines is not waning and has simply moved elsewhere in the world. Marlet. As long as it helps expand the market, that’s a good thing.
Asian buyers are a slightly different matter. Chinese wealth and passion for fine wines has helped determine the fortunes of the fine wine market for a few years now. To a large extent, Chinese buyers have asked Hong Kong middlemen to help them access the world’s best wines, so the combination of political turmoil in Hong Kong and questions about Chinese economic growth posed by the coronavirus has considerably slowed down the procedures. Both questions are still open, so we should not expect great support from the Asian market at this time.
Whether or not we believe the Brexit uncertainty is resolved is currently of marginal importance given the unknowns elsewhere. We are reassured by the resilience of the market over the past year and confident that prices will rise once some of the current concerns have subsided. Until then, we would just continue to sit.
Philip Staveley is Head of Research at Amphora portfolio management. After a career in the City running companies in emerging markets for investment banks such as Merrill Lynch and Deutsche Bank, he now heads the good wine investment research proposal with Amphora.