Clues from the mainstream
04.01.18 – Wine Investment –
The second half of December was notable for some interesting moves in various markets. Obviously Bitcoin bagged most of the headlines but at the more mainstream end the prices of gold and oil were marching steadily and quite rapidly up. Are these three elements, by any chance, related?
Almost certainly not, in our view. Whilst it is reasonable to see the gold price rise as a hedge in some small way against major stock markets being at all time highs, and the oil price move as a reaction to the combination of reducing stockpiles, an accommodative Saudi Arabia, and a global economy on the march, Bitcoin has to be viewed in an entirely different way.
We simply cannot see Bitcoin at this point as an alternative investment diversification tool, even if the Founders Fund from San Francisco has just disclosed a holding. Most Venture Capital groups have been investing in blockchain technology start-ups rather than venturing into crypto-currencies themselves, and for the moment the latter remain no more than a punt, however they may be dressed up.
Leaving Bitcoin aside, then, can we derive any clues for the fine wine market from anything else happening in mainstream markets right now? At Amphora we are great believers in charts. “A picture is worth a thousand words”, and so on, and the picture below conveys a lot of information. The trick is to decipher it.
The chart rebases the prices of oil, gold, the S&P 500, and the Liv-ex 100 back to 31/07/01, which is as far back as the currently available data will take us, and the point is not to say oh jolly good look how well wine has done. What we are trying to do is make sense of the movements and see if we can learn much from the patterns of performance.
The oil price move in 2003/2004 turned out to be a harbinger for the positive outlook for fine wine, in so far as it reflected burgeoning growth in the global economy and especially China. In fairness we weren’t to know it in 2004, but the Chinese were about to fall in love with fine wine. Oil overshot, as wines of the Left Bank were to do in 2011, and corrected, only to move ahead again as traders acknowledged that Chinese economic growth was for real. The 2014 correction was a supply side issue, as we all know.
After a simultaneous correction in the fine wine market as people came to terms with the global financial crisis, wine prices moved ahead again as Hong Kong removed import duty which had been 40%, and by now China had “caught the bug”.
What is also interesting on the chart is the gold price movement. Typically investors regard gold as a hedge against rising inflation and over-inflated share prices, but gold’s outperformance against the S&P from 2005 significantly pre-dates the financial crisis. It corresponds rather more towards the escalating growth in Emerging Economies, to which we can add India, which was growing at the best part of 10% per annum at this time.
The gold price decline from the end of 2012 reflects not just the Developed Economies stepping back from the abyss, (and taking off the hedge), but also the twin economic slowdowns in China and India, countries which are culturally huge purchasers of gold. Both economies peaked at a double-digit rate in 2010 and have been slowing since then, the afterglow of that peak extending into 2011 and 2012 and keeping prices firm until 2013.
Stability virtually across the board was finally restored from early 2015, as investors recognised that growth rates in China and India of 6-7% were actually perfectly reasonable (now perhaps not the time to debate the veracity of those figures), and certainly the firmer gold price at the end of 2017 is suggestive of an ongoing recovery in appetite from those countries.
What are the messages from all this for the fine wine market? The above chart would suggest a correlation between the gold price and the Liv-ex 100, but as we know that is a narrow index. Let’s add the Liv-ex 1000:
The Liv-ex 1000 is representative of the broader market, and as we can see the correlations are softer as a result. It is interesting to note that Liv-ex has been at pains of late to illustrate how much broader the fine wine market has become with many more regions and wines starting to trade on its platform. This can only be a good thing for investors. Put simply, more trades tend to result in tighter spreads, and tighter spreads facilitate trading more profitably.
Amphora believes that oil prices will be range-bound because rising demand will be met by increasing supply, but the key is “rising demand”. Rising demand results from a positive economic growth picture, and a positive economic growth picture means a greater propensity to consume more expensive wines.
As discussed, a firmer gold price results partly as a hedge but also from the immense buying power of consumers from China and India, consumption currently underpinned by a benign economic outlook. The Chinese love affair with fine wine is beyond reasonable argument, and anecdotal evidence suggests that India may not be far behind.
To recap: wine has overtaken beer and whisky as the beverage of choice for younger Indians; wealthy Indians are already very familiar with fine wine ownership; the stumbling block preventing any dramatic appreciation of fine wine imports into India remains the 160% import duty. Watch that space!
Finally, one more chart. In 1875 Anthony Trollope wrote a wonderful book called: “The Way We Live Now”. I can find no better topical expression for that than by adding the Nasdaq to the above chart. The top 5 constituents of Nasdaq represent almost half the overall weighting. The are called Apple, Alphabet (formerly Google), Microsoft, Amazon, and Facebook.
Good luck to everyone with your fine wine investments for 2018!