Sell in May and go away
05.09.2019 – Fine Wine Investment –
“Sell in May and go away”, holds the ancient stock market aphorism; “come back on St Leger Day”. Quite bizarre that commentators still feel the need to point out the inadvisability of this given the St Leger meeting is in the middle of September and you’d have to go back decades if not centuries to find anyone for whom a nice 4 month break might actually be an option. Mind you, observers of our current political scene might fervently wish it were.
The problem is that politics has an impact, and it is important to assess the impact for repercussions on the fine wine market. As it stands we either leave the EU without a deal on 31st October, or Jeremy Corbyn is the next Prime Minister. Other permutations are possible, of course. We could have another Hung Parliament and extend Article 50. The point is, it is quite difficult to see an outcome propitious for the UK economy on a 12 month view, even if any dilution of the UK’s commitment to leave the EU will likely result in a rebound in the value of the pound (which is itself not necessarily good for the economy).
So this is the thing: absent the possibility of going on a round the world cruise, what can anyone profitably do? It’s a bit like one of those megaphones leading the chants at a demonstration.
“What do we have?”
“When do we have it?”
You know where this is going don’t you? Domestic uncertainty and global instability and a weak pound and it is hardly surprising the fine wine market is rebounding, although in truth not as vigorously as we might have hoped. And hereby hangs the opportunity.
Towards the end of a stock market cycle interest switches from “growth stocks” to “value stocks”, as profitability diminishes with the onset of economic slowdown. In simple terms, when profitability is abundant investors chase the price of profitable (growth) companies higher and higher, on the basis that profits will continue rising forever. Then when profits become harder to come by they sell them and buy companies where (usually lower but more stable) profits exist. Utilities and so on.
So where does fine wine fit into this schema?
One of the reasons we at Amphora believe in fine wine as a safe haven is that the underlying dynamics as an investment are economically inelastic. The reason we are comfortable saying this, even though fine wine is a luxury item and sales of luxury items tend fall at times of economic contraction, is that the process is much less immediate. It is more attritional, if you like.
With sales of most luxury goods there will be an almost instant impact from any contraction of disposable income. Fine wine is made in such limited quantities and its life expectancy is so long that hiccups in demand from time to time don’t make much, if any, difference. Take Petrus, for example.
It is statutorily impossible for Petrus to produce more than 2,500 cases of wine a year. Most vintages have a life expectancy of over 30 years, which means that on average 1,000 bottles have to get drunk, globally, every year, for supply to run out. 3 a day. There are over 2,000 billionaires in the world, and over 40 million millionaires.
Even when there is no statutory restriction, say in Napa Valley, there is a self-imposed limit because these producers value their celebrity, and the last thing they are going to do is flood the market place with ready availability. An exclusive wine is hardly noteworthy if there is plenty of it.
From time to time consumption of fine wine will diminish, no doubt for a variety of reasons, but it is even statistically impossible to know how much is left, because figures relating to market availability don’t exist. All we know for certain is that it is made in very small quantities, is popular with a much wider consumer base than was the case 20 years ago, and it improves over time as it ages in the bottle. Collectors even prize antique bottles well past their dates for reasonable consumption because they have scarcity value.
We don’t know about you but that seems to us quite a lot of certainty especially at a time when it is at such a premium. By contrast no-one has a clue about the UK investment climate from one week to the next. That is absolutely not to suggest switching out of equities into fine wine, which would be absurd, but to highlight that in the current environment it does have certain (pun intended) relative attractions.
Meanwhile Opus One 2016 has just been priced. Apart from the 2011 which is ludicrously priced for such an indifferent wine (relatively speaking) a pattern has emerged whereby Opus One seems to be priced for age, rather than quality. We believe this will not sustain. Age will always be very important, obviously, but eventually critical appreciation is likely to have a say.
As it happens the best relative value for that producer is 2013 with 2012 a close second. If you believe the age before beauty syndrome will persist a bit longer you can buy the 2007 for £3,200, which we firmly believe will repay investors as we move down the line.