The phrase “these uncertain times” has been thrown around an awful lot in the past few months, however, it is certainly more than a just a banal talking point. The United States just released the worst GDP growth figures since their records began, and the United Kingdom is predicting a worse recession than the financial crash of 2008. It is absolutely going to be a tough time for investors as the recovery from the fall-out of COVID-19 gets underway over the next few months, and it will be years before the global economy returns to pre-pandemic levels.
With that being said, there are some investment avenues and markets that are holding steadier than others, and fine wine is one of them. When viewed over a much longer timescale, this is perhaps not a surprising turn of events; from 1988 to 2018 the FTSE100 saw growth of 300%, while fine wine grew over 2000%. Even in the past 5 years, this trend continues to hold true, with the FTSE100 falling 14% compared to a growth of 75% for the fine wine market.
Let’s narrow the timescale down again: in the last six months, the FTSE100 has plummeted 33%, the Dow Jones is down 19%, and Japan’s Nikkei 225 has fallen by 27%. In contrast, the Liv-Ex 100, the largest fine wine trading index, has fallen only 2.5% and this was largely due to geopolitical shifts such as Brexit, as opposed to being tied directly to the pandemic itself. The basic laws of supply and demand are largely responsible for this trend as the relative scarcity of top vintages produced every year means that over the medium to long-term, the vintages become increasingly rare and thus more valuable, not to mention their increasing quality as they age. It becomes clear from these numbers that fine wine has consistently provided a high level of returns due its position as the best performing of the co-called “passion assets” over the last decade. In fact, fine wine has outperformed 98% of all over assets during this period, and investors are being encouraged more and more to allocate between 1 and 10% of their portfolio entirely to fine wine.
Whilst this does afford the fine wine industry with a relative level of stability, there are still some minor concerns. Sanitary concerns in the face of an infectious disease has meant that many of the en primeur tasting events have either been cancelled entirely or attended have been by far fewer participants than is usual. With many potential overseas investors not able to attend the tastings in Europe this season, there is bound to be a knock-on effect and perhaps some market correction.
Much of the growth of the market growth over the last 10-15 years has been from the widening of demand to Asian consumers and global investors more generally. Unfortunately, there is not much demand left in reserve and thus we may be coming to the end of this particular bubble of growth. The market will instead now become ever-so-slightly more volatile as the quality of the yearly vintages once again becomes the primary factor in driving demand. The likely outcome in the short term is a drop in prices: Bordeaux, Burgundy, Tuscany, and other regions such as the many Italian wines, will have to lower their prices in order to entice opportunistic buyers – some reports are predicting a price fall of up to 30%.
It may not be all doom and gloom though, a similar price drop (25%) was reporting in the wake of the 2008 financial crash yet and the market quickly recovered, outperforming both equities and gold in the following 5 years. In fact, it took the Liv-Ex 100 index less than two years to recover to pre-recession levels. We do not know yet what the upcoming recession will look like; whether it will be V, U, W, or L shaped, but the low correlation between fine wine and equity (less then 1%) means that it still provides a high attractive diversification option for investors during such a crisis, potentially helping to offset any fears over the decline in prices in the short-term.
The predicted price drop could therefore allow a wide breadth of investors with access to top-quality vintages that would otherwise be unsuitable due to their price or scarcity. As opposed to signalling a bursting bubble, this market correction could put those who are willing to buy now, during the pandemic itself, in a position to make excellent returns as the consumer trends return to normal over the next five or so years.