Pupublished 12 Sept 2016
Why yield-thirsty investors are now lapping up fine wine
The liquid asset is up 16%, making it one of the best performing
Fine wine has suffered four years of poor performance, but has in 2016 returned as one of the strongest investment classes out there — and the liquid asset will continue to throw off juicy returns for years to come, experts say.
The Liv-ex Fine Wine 100 index, considered the industry’s leading benchmark, has rallied 16% since the turn of the year. That easily outperforms a 4.1% gain for the S&P 500 index SPX, +0.38% a 3.5% drop in the dollar DXY, -0.08% and a 7.2% loss for the benchmark Stoxx Europe 600 SXXP, +0.09%
A key reason for the outperformance is that yield-thirsty investors have turned to tangible assets in a world of ultralow interest rates, where many other assets, such as bonds, are returning next to nothing.
But a range of other factors have also fallen into place this summer, according to Anthony Maxwell, director at Liv-ex, a global marketplace for fine wines.
“The wine market looks underpriced overall after four consecutive years of going down,” he said. “The fundamentals are good now, the quality is there, the brands are well established, demand is growing, and supply is not increasing.”
The fine wine market enjoyed some stellar years between 2009 and 2011, when central banks drenched the world with cheap money that was looking for a home. At the same time, Asian consumers — specifically, those in China and Hong Kong — developed a taste for high-end wine, both for drinking and for giving as a gift. That helped push the price to all-time highs in the summer of 2011.
Then its fortunes turned. That same year was the beginning of a string of cold and wet summers that ruined grape harvests, leading to years of bad vintages. A tough corruption-related crackdown on gift-giving in China further shook the sparkle out of the market, while the return of hard times for the global economy discouraged the drinking of fine wines.
Now enter the 2015 vintage, which experts say is rekindling memories of the stand-out wines of 2009 and 2010. The sluggish high-end market is finally shaking off its hangover, they say.
“We knew 2015 was going to be a good vintage. In anticipation for that, the whole market went up,” Maxwell said. The first bottle of that vintage started going on sale this spring.
No Brexit aftertaste
The vineyards on the Liv-ex 100 index are mainly found in renowned French wine regions such as Bordeaux, Burgundy and Champagne. But there’s also the less famous Ornellaia and Sassicaia from Italy, as well as Penfolds from Australia — as well as the U.S. winery Screaming Eagle.
While the quality of the wine is one part of the equation, another is the economic environment. While the U.K.’s Brexit vote in June shook the country’s currency, it proved a welcome surprise for the wine market. As most bottles in wine investing are priced in pounds, the exclusive tipple become relatively cheaper for buyers outside the U.K., fueling a buying spree among U.S., European and Asian investors.
The Liv-ex 100 index jumped 3.6% in the month following the vote, its biggest advance since November 2011. It continued higher in August, rising 2.9% to take its year-to-date rally to 16.2%.
Sterling GBPUSD, -0.2350% is still down more than 10% against the euro, dollar and most other foreign currencies since the vote. That means high-end wines should continue to attract overseas buyers, said Simon Staples, sales director at Berry Bros & Rudd, Britain’s oldest wine merchant.
“The Brexit vote took not only the country by shock, but the fine wine world too,” Staples said. “It’s the currency difference at the moment that’s making prices rise far faster than the last five years.”
Whether this Brexit-driven currency-boost will continue depends on a range of factors in coming months, including the U.S. Presidential election in November, Staples noted.
“I see September to November as potentially a great time to buy. The massive instability of the U.S. election is another story,” he added.
But the wine scene is a relative unknown for most investors, and before you step in, there are a few things you should keep in mind, experts say. Elissa Bayer, senior investment director at Investec, stressed that the maxim that good wines get better with age also applies to investing in the asset.
In other words, this is not for the trader hoping to buy a house or engagement ring with their returns next year.
”You need to hold the wines for at least five to 10 years. It’s a long-term game,” she said, adding that inexperienced investors should make sure to get professional advice before snapping up their first bottle of Lafite Rothschild, Dom Pérignon or similar.
“This is for people who are doing it in addition to their other investments, as a smaller part of their portfolio,” Bayer added. “And it tends to be the wealthier people, because you also run the risk that your fine wine — for whatever reason — could deteriorate.”
That’s why storage is paramount in wine investing. If kept under the right conditions, such as in temperature-controlled warehouses, quality bottles can last up to 30 years, according to Staples from BBR.
Most fine wines are traded in the U.K. Staples advises buyers — including those outside Britain, in the U.S. and elsewhere — to keep their investment wines “under bond” at U.K. government licensed warehouses to avoid paying excise duty and local sales tax. Additionally, wine profits in the U.K. are exempt from capital gains taxes because it’s deemed a “wasting asset”.
Staples suggested investors avoid the really expensive grapes and stick to a wine they might feel like drinking as a treat. The argument for this is twofold: First, if the global economy sputters again, it’s more likely that wines with a lower price tag will remain popular. Second, investors can afford to open a bottle if they want to see what the fuss is about.
“Most people who enjoy wine can see that treating themselves to a fine bottle at home or in a restaurant for £100 is conceivable. Wine at £500 a bottle has eliminated the vast number of wine lovers,” he said.
That’s also another reason he sees wine as a more attractive investment than the more traditional assets.