Supply and demand it
14.12.17 – Wine Investment –
We are drawn this week to a note from Goldman Sachs explaining its bullish outlook for commodity prices, and once you get past sentences like the market being driven by “a structure known as a backwardation that will lead to a positive yield roll” you find that the outlook really is very positive, and in ways a fine wine investor should recognise. You see, it is not just wine critics that have a terminology all of their own!
What is behind the forecast is supply and demand, the key drivers of prices for most uncontrolled assets all over the world, and particularly potent in the world of fine wine. The outlook for the global economy is good, with leading economic indicators for the most part trending upwards, and equity markets which reflect expectations rather more than existing conditions are enjoying an excellent year.
Key to the Goldman note is the distinction drawn between the outlook for copper, on the one hand, and aluminium, on the other. What tends to happen in most economic environments is that supply is a function of conditions that producers believe will pertain at the point they are able to crank up their new lines of supply.
This is very easy to get wrong, of course, because in most industries you can’t turn supply off and on like a tap. There is a lead time, and this can be deadly. You might build a hotel, for example, in expectation of tourist arrivals continuing to rise, but if they don’t you end up with an albatross around your neck. Equally, tourist arrivals may continue to rise but everyone might have the same idea as you leading to a hotel supply glut.
Goldman argues that most of the potential increase in supply of copper will be on stream over the next couple of years, because after the downturn in 2014 producers reined in their capital expenditure, understandably enough, and so if demand stays constant it will eventually exceed supply, leading to higher prices. In the case of aluminium, however, it forecasts increasing supply over coming years particularly from China as it ramps up its “cleaner” industrial capacity.
We have, I hope, a very good reason for spending a little bit of time on these issues, because there is a world of people out there who haven’t yet been introduced to the miracle of supply and demand as it affects fine wine prices. Amphora clients and indeed readers of this column and beyond will regard it as old hat, no doubt, but we believe that fine wine investment as an asset diversification tool is in its infancy. Not only that, but the evidence is that consumption from the Emerging Economies is rising fast. I wonder what percentage of the membership of 67 Pall Mall is of Asian descent?
It is therefore worth repeating: no matter how great the demand for fine wine, it is not possible to increase supply (from the majority of producers). The relatively small size of the market will prevent anyone like Goldman Sachs from commenting on it, of course, so we will remain blissfully free of terminology like contangos, and so on, but we must recognise it when we find what they say pertinent to our world.
Meanwhile why buy Bitcoin when you can buy Burgundy? The sector has clearly had a very good second half of the year, accelerating sharply in December. Regular readers will know that Amphora advises caution from an investment perspective whenever there are questions over the secondary market, and traded volumes for all Burgundy Liv-ex constituents are notoriously thin. That said, bids are more numerous than in the past, even if in many cases spreads are extremely wide.
To our way of thinking, liquidity in a market is more important than absolute price. It is possible to argue, and some do, that no fine wine is worth the money. We believe this is a fruitless point: clearly a lot of people are more than happy to pay what gainsayers believe to be egregious prices, and let us remember that the majority of these are consumers, not investors. Who are we to say whether or not someone should be forking out £1,500 for an Haut Brion 1989 in a London restaurant? It is no business of ours.
The argument we stress is that since there is a market already, why not see how best to play it, rather than rant about it, and when you look at how best to play it you cannot avoid the secondary market question. This is only irrelevant if you aren’t going to need to sell it at any point, in other words, if you are going to drink it.
Rather than wring our hands at having missed the Burgundy boat, as it were, we take comfort in the increasing liquidity on offer in parts of the sector, and once we believe that liquidity is sufficient, we can start to take an objective view of relative value. Hopefully then 2018 will see us able to recommend exposure to that sector as we continue to try to outperform the benchmarks.
On that note may I wish all our readers a very Merry Christmas and every good fortune for the New Year.