Fine potential in India

Hard on the back of a visit to Taiwan and Japan, Amphora Portfolio Management has just completed a few days in India.

The company has had a presence in Mumbai for over a year and it is always astonishing how eye-wateringly wealthy so many Indians are.

Although the population is well over 1.3 billion the middle-class as such is over 330 million, so roughly the size of the entire population of the United States.

In a nation traditionally more disposed to whisky and beer, many younger Indians are getting into wine in a big way. Cultural shifts of this sort can happen quite quickly in the developing world.

If you remember that wine consumption in the UK was the preserve of the relatively wealthy until the ’80s, and see how popular it is now, then for anyone involved in the industry it is worth keeping an eye on markets and opportunities like India.

What was reinforced even more on this trip, however, was the realisation among high net worth Indians of the potential for fine wine as a store of wealth. For many years, generations even, Indian families have put their faith in gold, and in certain cases diamonds, as a store of wealth.

This was customarily seen as simply innate conservatism, however the wisdom of such activity is becoming increasingly clear.

With economic growth seemingly hard to come by around the world, administrations in developed markets like the US and Europe have resorted not just to record low interest rates, but wave after wave of quantitative easing.

This is, in effect, printing money. If more money is made available, more will be borrowed to engineer growth, is the idea.

If you think about it, and as current events are playing out, governments can carry on printing money till the cows come home. They are creating an unlimited supply.

Now as any economist will tell you, unlimited supply of anything has a depressant effect on its value, just as diminishing supply tends to force prices up.

What the Indians have known for many a long day is that supply of gold is limited. Not diminishing, obviously, but limited, and along with one or two other cultural considerations like affinity with gold jewellery, this has made it a no-brainer for them to increase holdings. The fact is that in the event of any global financial crisis this leaves them sitting pretty.

What they are now starting to be made aware of is that much the same holds true for fine wine, as for gold. In fact you could argue that it is even better.

In net aggregate terms fine wine availability may not automatically diminish year by year, but as we know in specific terms it absolutely does. There is a desirability element to fine wine ownership in much the same way as for gold jewellery, and when you add in the increasing consumption of wine that Indians see all around them, it doesn’t take a genius to understand the attraction.

Consumption of fine wine in India is presently somewhat constrained by punishing import duties of 160%. Obviously were that figure to fall, rates of consumption would escalate, further supporting the supply/demand dynamic, which already underpins the investment case. But that doesn’t need to happen for Indian investors to up the ante.

All that’s required is an increasing acquaintance with the fine wine market place as a simple store of wealth, which we at Amphora are doing our best to assist.

Meanwhile the rally in the Liv-ex 50 shows no sign of abating and is even starting to escalate.

This is very important for many reasons, the principal of which is that for the popular press the fine wine market and the first growths of the Bordeaux Left Bank are one and the same thing.

This couldn’t be further from the truth, obviously, but it is significant that while the Liv-ex 50 and 100 indices were correcting from mid-2011, and while wines from Burgundy to the Rest of the World, from Champagne to Tuscany, were doing very nicely thank you, as the chart below illustrates, all the banner headlines could talk about was the ongoing decline in “fine wine prices”:

In addition, most portfolios carry a substantial weighting in the Bordeaux Left Bank, simply because it has been on the radar for the longest. That is traditionally where the interest and liquidity have been.

At Amphora we have been increasing client portfolio exposure to the Left Bank for about 6 months now, and there was some nervousness at the time of the pre-Christmas fall in prices. The market has now more than made up for that decline. It is another reminder of how difficult timing can be in any financial market place.

The crucial thing is to have a well-reasoned argument, and commit to it. Sadly there are no one way bets, and indeed the market has the potential hurdle of the next en primeur campaign to overcome.

There is never any guarantee that the Bordelais will be market-friendly with their pricing (it is some time since they were!), but at some point the market was likely to move on from that concern. Perhaps 2016 is that year.

Philip Staveley (pictured) is head of research at Amphora Portfolio Management. After a career in the City running emerging markets businesses for such investment banks as Merrill Lynch and Deutsche Bank he now heads up the fine wine investment research proposition at APM. www.apmwineinvestment.co.uk