Fine wine reacted strongly, as The Wine Investment Fund (TWIF) expected it would. Prices firmed significantly, partly because of the defensive properties of wine as a physical asset (meaning wine performs well in times of market uncertainty), and partly as a result of sterling’s weakness in the aftermath of the vote.
For the month as a whole, the main indices increased by 2.1% (Liv-ex 100) and 2.2% (Liv-ex Investables). Almost half of this increase was prior to the referendum result on 24 June, with half in the final week. Lafite was the strongest performer across a range of vintages, which has historically been the sign of a strengthening market.
Falls in sterling have been well documented. Looking at the main currencies relevant to the fine wine market, the drops on the month ranged from 7.5% against the Chinese renminbi to 15% against the Japanese yen. These movements dwarf those from volatility.
From an overseas perspective, prices for wine stocks in the UK (which is by far the largest source of fine wines, wherever a buyer is located) are now significantly lower.
Whilst weaker sterling is a factor in fine wine’s recent resilience, its defensive qualities are fundamental. As a physical asset, fine wine tends to perform well in periods of uncertainty, acting as a store of value: gold, which has very similar characteristics, rose by 10% in the week following the Referendum.
Wine is also historically much less volatile than equities, implying lower levels of market risk. Finally, it is also not linked to the prices of other assets in most circumstances: the long-run correlation between wine prices and the FTSE 100, for example, is just 0.04.
Investors looking for somewhere to allocate funds will have noticed that wine is at an advantageous point in its investment cycle. Following a lengthy period of declines, prices flattened in 2015 and since then have turned up. Long-run returns average around 10.5% per annum, based on the longest reliable index of fine wine prices, the Liv-ex Investables, since its inception in 1988. The price declines from 2011 to 2014 left the market below its long-run trend level, with the possibility of more rapid increases to return to the trend line. In 2016 to date, the Liv-ex 100 has increased by 9%.
We have not only seen price increases, but also sharp rises in volumes traded. This seems to be the result of both overseas buyers taking advantage of lower prices due to the weakness of sterling, and some speculative interest from those anticipating further rises in prices. Given that we’re at a very advantageous point in wine’s investment cycle, and the continued attractiveness of wine prices in currencies other than sterling, there looks to be plenty of mileage left in the current upturn for investors to benefit from by investing now.