Piggy in the middle

It’s with some reluctance that we turn our attention this week to Brexit deliberations, not because they are unimportant, but because they have already generated their fair share of hot air.

Like everyone else, we at Amphora Portfolio Management will be hard pressed to separate fact from fiction in respect of what we are informed by the political elite over the next couple of months.

There is a financial publication called Barrons which has the frustrating habit of arguing one case perfectly plausibly on one page, while arguing the opposite side of the same case equally plausibly on the other. So it feels with the champions of the ‘in’ and ‘out’ factions.

What is undeniable is the effect on our precious pound sterling so far, and since the fine wine market place is denominated in sterling it behoves us to have a view.

The pound has weakened largely due to the uncertainty created by the possibility of Brexit. Normally currencies are driven by things like current account balances and reflections on interest rate direction, but they are secondary for the moment. To underscore this point we saw a move from 1.29 to 1.26 against the euro on the strength of Boris’s decision to join the ‘out’ campaign.

It seems we are in for a period of currency uncertainty, then, until 23 June. We would be in for a period of even greater uncertainty in the immediate aftermath of an ‘out’ vote. How long this uncertainty may last, and how low it might drive the pound, is quite frankly anyone’s guess.

Economists the world over get paid fortunes to agonize over such matters, and you could still drive a tank through their range of forecasts. So let us confine ourselves to the current weakness, and the prospect of further weakness, until the end of June.

Typically, investors hate uncertainty. An investment bank may thrive on risk and volatility, but that is because it can hedge against the effects of its core view being wrong. Most private investors can’t. This means two things in the current environment.

Sterling investors may be unexposed, because the market is in their base currency, but they then have then to work out the impact of foreign currency investors on that market place. Foreign investors, meanwhile, are investing in a market whose underlying currency is on shaky ground, but whose assets are getting cheaper by the day.

It is quite difficult to argue against the fact that the fine wine market has strengthened as sterling has weakened against the euro in the last few months, nor indeed that the Liv-ex 50 had softened earlier as sterling strengthened:

Certainly, anecdotal evidence in November indicated that the strength of sterling so improved the bids in the market for traders in Bordeaux that they were taking full advantage by dumping what they could.

We also know that since Asia became such an important participant in the fine wine market, and since many Asian currencies are more or less managed against the US dollar, we ought to keep an eye on USD:GBP too:

A very similar recent story as for the euro, although without the sterling strength back in October.

This all becomes an easier equation if you have a strong referendum view. If you think the likelihood of Brexit is remote, the balance lies in favour of taking advantage of a currently weak sterling, a currency which might reasonably be expected to rebound in the event of a ‘stay’ vote.

You are getting assets at quite close to five year lows, in the case of Bordeaux, in a currency which you expect to rebound. This is what Amphora believes is currently helping to drive the market.

The less certain you are about the referendum vote, the more risk you are likely to take off the table. This is where such supply as is being made available to the market is coming from. In stock market parlance the ‘stale bulls’ are also taking advantage of present demand and selling up.

Right now most Brits are watching domestic polls show an erosion of the earlier very confident ‘stay’ stance, leading to greater uncertainty, while most foreigners can’t for the life of them see why Britain might want to leave. The foreign view attaches more weight to the ‘concessions’ the Prime Minister returned with than does the local.

One thing is certainly worth bearing in mind. Investing in fine wine by definition requires that the wine gets drunk throughout its lifetime. Thus supply to the market shrinks, leading to increasing scarcity and desirability, while it is also merrily improving as it ages in the bottle.

If the pound is indeed on a slippery slope, it will be a boon for consumers from around the world, and as consumption rises, so does scarcity, and so the cycle goes on. This is not a zero sum game, but it’s an ill wind that brings nobody any good.

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