Can fine wine prove a recession-busting investment?

In order to approach this question evenly it’s important to consult what the major newspapers (both financial and mainstream) have been saying about fine wine investment, both before and since the recession began to really take hold.

In May 2008, a point in time widely regarded to be pre-recession (although many have claimed they saw it coming way before this), the FT were comparing the fine wine investment market favourably with stock market based investing in good times & bad in the following article:

WINE INVESTMENT 2008 – Equity comparison: Best in class when adjusted for risk
By William Beck, Financial Times
Published: May 19 2008

In this article the FT compare the performance of the Liv-ex 100 (the index of the leading 100 most sought after wines compiled by the London International Vintners Exchange) with equity and gold markets. What they discover is that the fine wine investment market tends to perform far better when adjusted for the lower risks involved, which they assess via the relative likelihood of upward or downward price volatility. Investors in fine wine will have been glad to read that fine wine shows far less downward price volatility.

Indeed, during weaker market conditions the prices of leading investment grade wines (when analysed using the Sharpe and Sortino ratios) are “characterised not so much by tumbling prices as by price consolidation, lending itself to lower volatility. Unlike the stock markets, medium term upward shifts in fine wine prices tend to be permanent”.

According to research completed by Mahesh Kumar, the FT go on to explain that assuming a standard investment timescale of five years (which is what Provenance Fine Wines would always recommend), it is possible to show that fine wine may offer the least downside risk to investors.
His work shows that since 1987 the highest annual average return over any five year period has been 27 per cent per year, and the lowest was 3 per cent per year. No five year period has shown a negative average annual return.

Obviously one cannot say the same for either the gold or equity markets; these have both shown frequent negative rolling five year average annual returns throughout the 1990’s in the case of gold and in the early part of this decade in the case of the equity markets.

The FT clarified that when considered as a long-term investment (five years), fine wine can therefore be viewed very positively – in that it is not likely to show consolidated downward movements in price. In fact, the reasons for this are linked to its very nature as an asset class – the fundamentals of the fine wine market form the straightforward yet forceful heart of the investment case: increasing scarcity of supply.

So, we can allow ourselves to assume the undeniable nature of the fact that fine wines become rarer as they are consumed. But more interestingly, how much more or less quickly might one imagine this is happening these days?

Before 1990 fine wine demand was substantially the preserve of old world Europe and their brash younger brother – the United States. These days the stress on the supply chain is worldwide. Singapore and Hong Kong have long been regarded more developed markets, yet newspaper coverage remains fixated on the huge wealth coming from Russia and the rapidly emergent moneyed classes in China and India.

Such large increase in global demand may ordinarily lead to attempts to increase the supply of a product; but each vintage of leading investment grade wines remains at strictly fixed supply levels. Indeed, crop yields are now in fact lower than they have been as a result of the increase in intensity of competition for quality and the ongoing search for another classic vintage.



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