Nosebleed anyone?
Well, no-one can accuse the Capital Markets of being dull.
All over the world, over the last few weeks, global stock markets have been reaching all-time highs. Some, in the US for example, breached long term highs a little longer ago. Incidentally, had Apple been included in the Dow Jones Industrial Average back in February 2008 when they plumped instead for Bank of America, the DJIA would by now have been over 22,000 rather than a tad north of 18,000. That’s pretty extraordinary.
Markets like the Sensex in India have been having a rare old time, and the Shanghai Composite is up over the last 6 months from 2000 to over 3,500, besting the pre-crisis levels of 2008. Tokyo is at levels not seen since the last century. Even the UK recently broke through the 6930 level it first touched in 1999. This is leading, naturally, to an increase in the gradient of the wall of worry that bull markets typically climb.
It is also leading to the confusion you usually get at market highs. Take the US for example. Ostensibly, the market has had a great run because of low interest rates resulting from quantitative easing. But the US$ is strong because quantitative easing has done its job (the economy has recovered), and so interest rates are going to rise this year. But the stronger US$ has, along with lower oil prices, kept a lid on inflation (because in US$ terms the cost of imports has gone down). And if there’s no inflation, they can’t raise interest rates. And if they can’t raise interest rates, the US$ should not be so strong. There’s a hole in my bucket, dear Liza dear Liza.
So what happens next?
Markets have actually been strong for several, and varying, reasons. Easy money through quantitative easing in the major economies of the US, UK and now Euroland. Accommodative policy measures in Japan. Political euphoria in India. Acknowledgement that in China, 7% growth for an economy of that size is perfectly acceptable.
Nearly everywhere, administrators are concerned at the absence of inflation. Those of a certain age, not to mention nationality, will find this phenomenon unusual. For a significant period in the post-war era, keeping the spectre of inflation under control has been at the heart of economic policy. Economies in countries from Latin America, to Africa, to Asia saw their prospects all but destroyed by rampant inflation.
Well, now we want it back, and the reason for this is quite simple. As any Japanese businessman or shopper will tell you, you don’t buy things if they are going to be cheaper tomorrow. If shoppers don’t buy, and businessmen don’t invest, the economy stalls. An absence of inflation, giving rise to the threat of deflation, is therefore a dangerous thing.
Now, what has all this got to do with the fine wine market?
You may have read reports about how fine wine is an “uncorrelated asset class”. By this the authors are opining that fine wine prices move independently of other asset classes. The problem is that this is not just lazy analysis, it is also now out of date.
At the same time, you might read that fine wine will be a good hedge against the return of inflation, rather as you might expect a commodity to be. This presupposes that demand for fine wine has to rise in line with demand elsewhere in the global economy. Only partly true, in our view.
For most of the post-war years, the global economy grew, and inflation had a tendency to rise. There weren’t the tools to control it quite so easily 50 years ago, and occasionally it got out of hand. For over 50 years from 1945 to 1995, fine wine prices rose steadily, in line with rising living standards. Fine wine was originally the preserve of the wealthy, and trading was relatively muted. If prices didn’t rise, wine stayed in the cellar until they did.
This gradual, controlled rise, was indeed uncorrelated on a short term basis to the movements within other asset classes, largely because those other asset classes were both much more active, and much more responsive to short term stimuli. In short, much more volatile.
This all changed in the mid 90s. however, when the fine wine market opened up meaningfully in Japan, and as we all know, the advent of China and broader Asia into the picture in the mid 00s completely transformed the playing field.
We now have to analyse much more closely what makes this market tick, and what represents “good value”. As APM clients know, we spend an awful lot of time doing this, and are about to launch our upgraded algorithm, which gives an even more accurate impression of precisely where value, on a relative basis, exists in the market place.
But back to the global stockmarkets. Ken Fisher, one of the world’s foremost investors, points out:
“Investing isn’t about choosing between country A and country B or going all-in or all-out one region. It’s about global diversification.”
Diversification is the key to successful investment. It is at times like this, when equity markets are nervously teetering along at all-time highs, that exploring alternative assets is worthwhile. Not because they may or may not be uncorrelated, but because they offer further scope for asset diversification.
As we all know, unusually amongst the “alternative” asset classes, the simple diversity of the fine wine market gives investors the opportunity, whilst diversifying their asset exposure, to take that diversified approach right to the heart of their wealth management process, and that HAS to be a good thing.