Wine Market 2020 Performance
During times of economic uncertainty there are always winners and losers. Rather than batting down the hatches and waiting for the COVID storm to pass, the more experienced investor will look at diversifying away from the mainstream financial markets in order to achieve healthy returns with increased stability. The defensibility of the wine market is what is so attractive to investors right now. The fine wine industry is not correlated to financial markets nor is it dictated by any single economy, the strict supply and demand rules of this market allow the value of wine to consistently appreciate as the supply gradually starts to decline.
If you had invested £100 in the fine wine market in 1952, your investment would now be worth £420,000. On the other hand, £100 invested in the stock market would now be worth a modest £100,000. Recent research shows that, thanks to this impressive track record, the majority of financial advisors would support investing in fine wine as a way to diversify certain client portfolios.
So, how is it that fine wine has managed to weather financial storms and generate such consistent market-beating returns? The answer lies in a very simple economic model. Fine wine prices are primarily dictated by supply and demand. Fortunately for investors the supply is extremely limited since fine wine is an artisanal product made in miniscule quantities, much like haute couture clothing or top-end watches. What makes fine wine different from these other types of asset-backed investments is that it is made to be drunk. Every time a rare bottle is consumed, the value of the remaining bottles gets a welcome boost. On the flip side, with lockdown measures in place for the majority of the world, demand is sky rocketing. Consumers, rather than purchasing wines at a restaurant for 4x their real value, can now spend the same money on a much higher quality wine from the comfort of their own home. Newer markets like Asia, Africa and Latin America where elites are developing a taste for fine wine have also contributed to this ever growing demand.
The wine market is a mercenary, it follows the money. Back in 2008 when the Western economies were in turmoil, a huge influx of Asian investors kept the market afloat and we saw prices rise on top Bordeaux wines by 22% p.a from 2007-2011. We are seeing a similar trend now with the everyday investor turning to this unique market as a safe place to store their capital.
Long Term Historical Performance
The idea that wine improves with age dates back to the 18th century and has worked on that premise right up until the current day. Not only does the quality of the asset improve, as time goes on the supply diminishes to a point where there are very few left. At this point the prices will increase exponentially from there. Since 1988, when reliable data was first collected, the wine market has shown averaged returns of 12.4% p.a. As portrayed by the graph below, the market has consistently appreciated in value over time.
Global economies are struggling to come to terms with the recent pandemic and investors are returning to alternative investments in order to mitigate their risk. The wine market is renowned for having low volatility and is living up to its name of being a recession proof investment. With some financial markets losing 30% since the start of 2020, all key regional indices have remained extremely stable. The graph below illustrates this point perfectly.
The major regional indices in the wine market have performed extremely well comparably year to date. With the Tuscany 80 index leading the way at 16.37% growth, the graph above demonstrates the trend of the top five main regional indices throughout 2020. As you can see, the average across the board as of the end of October 2020 is 6.83% growth since the start of the year.
The wine market has shown extreme resilience during the most uncertain time our generation has seen. While some financial markets were taking a beating, the fine wine market remained extremely stable throughout the height of COVID lockdown. This isn’t to say that every single wine on the market will achieve the long term average of 12.4% p.a, however by diversifying across all the major regions, you are able to position yourself perfectly to attain strong growth annually without the volatility.
Investors portfolios which are heavily linked to the equities market have seen quite the opposite. Although the FTSE 100, S&P 500, DOW Jones and the NIKKEI 250 have regained some momentum following a disastrous start to the year, the threat of more national lockdowns over the winter has seen the worst week for global stock markets since March. The FTSE 100 has fallen to its lowest level in 6 months as financial markets react to surging COVID-19 infections around the world. There was a sea of red for stocks across Europe and the US in last Wednesdays trading over fears the pandemic will deliver a deeper than expected hit to the global economy in the months ahead. The FTSE 100, which saw £37B wiped off, was more than 3% down in last Wednesdays afternoon trading leaving the index 26% down YTD. In New York, the Dow Jones and wider S&P 500 lost more than 3%. The WO150 index, which tracks the 150 most traded investable grade wines, is a solid 5.81% up since the start of the year, without the nerve racking volatility that global financial markets have been facing.
This market offers steady, sustainable growth and anyone looking for overnight success may have to look elsewhere. We always recommend holding a wine portfolio for a minimum of five years to ensure you give your portfolio enough time to mature. Throughout the investment your designated consultant will be in regular contact to ensure you are kept updated on the performance of your positions. Although the wine market doesn’t need much maintaining, our consultants will always ensure that we are achieving the best returns possible.
Broadening Wine Market
Ten years ago, activity on the market was dominated by a narrow group of top Bordeaux wines, however the market has broadened significantly since then. Bordeaux’s trade share is down from 95% in 2010 to 35% in 2020 and there are now even wines from the UK and China being traded on the Liv-Ex platform. This is a clear indication of the lucrative nature of the fine wine market and how investors are broadening their spectrum when it comes to investable wines. This allows our consultants to be much more innovative with their approach, although the majority of wines offered are still traditionally from the Bordeaux, Burgundy, Italy & California region.
As of late, the new trend for wine investment seems to be Italy. Since the incorporation of the Italy 100 index back in 2003, the market has improved in value by over 200% with very little volatility. The quality of Italian wines is now regarded as being just as good as French Bordeaux, however the pricing is quite a bit cheaper. For investors that are looking to ease their way into the market, Italian wines, namely the “Super Tuscans”, may be the to ease their way into the market, Italian wines, namely the “Super Tuscans”, may be the perfect starting point.
For the more experienced investor, Burgundy wines are usually the investment of choice. Burgundy wines, although the most expensive available on the market, have rallied over recent years. Due to their minuscule production and increasing demand, we often find that Burgundy wines outperform most wines that are available. The Burgundy 150 index has risen in value by 82% over the past five years, averaging out to 16.4% p.a. The most luxurious wine brand in the world, Domaine Romanee-Conti (DRC), is one of the main reasons for this. It is common for DRC wines to appreciate in value way above the overall average, with some vintages increasing in value by 150-200% over the past five years. DRC produce eight extraordinary wines from one chateau, their minuscule production and unrivalled quality offer the more experienced investor a chance to own a little piece of history. As you can imagine, DRC wines are the most expensive wines on the market, however a larger investment can often mean higher returns.