The returns on the fine wine market are significantly in excess of those on the major stock markets. For example, the FTSE 100 is +8.6% over the same period. Meanwhile, returns to bonds and cash continue to fall – in some cases turning negative as monetary policy loosens yet further.
Indeed, in the UK, interest rates were reduced to 0.25%, their lowest level in the Bank of England’s 322-year history. This, in turn, has pushed sterling even lower, falling by another 1% against the US dollar and euro in August.
The fine wine market is benefiting from a combination of three factors. First, the fine wine market itself has an underlying health not seen since 2010-11. Merchants’ stock levels are relatively low and prices fell so far in the 2011-15 correction that, despite recent increases, they are still low enough to attract those buying to drink.
Second is exchange rates. Sterling is at its lowest level against the dollar since the mid-1980s, and fell again in August. Overseas demand from both buying to drink and those buying as an investment has been boosted as a result (the secondary market for these wines is predominantly a sterling market).
Third is the low interest rate environment. For anyone against the suitability of fine wine as an investment, the absence of any dividend or coupon income has always been an offputting factor. But in a world where cash returns are negligible and possibly negative, this key argument carries very little weight.
The question of just where to earn a return on one’s investment has perhaps never been more acute – and particularly so given that many stock markets are sitting at or near historic highs. Investors all around the world are searching for better returns than those on traditional assets and, with established indices and exchanges, wine is at the forefront of such “alternatives”. Investment inflows are convincingly larger than outflows, again for the first time for many years.
The overall result is a market which remains in good health. The bid-offer ratio on Liv-ex sits at around 1.5x: historically anything above 0.5x has been regarded as denoting a positive market. Trade volumes have remained relatively healthy over the traditionally quiet summer months.
The market’s bellwethers, Bordeaux as a region and Chateau Laffite in particular, are leading the way. Despite the rapid price increases this year, the index remains well below its long-run trend level and lower volatility and low correlation to other asset classes offers attractive portfolio diversification.
A pause at some point in the autumn cannot be ruled out, but with these underlying conditions still very favourable, the medium term outlook for fine wine remains positive.