Small screen boosts confidence in fine wine

Beady-eyed investors will have had the chance to see and hear Amphora’s own James Fletcher on CNBC last Thursday. Yes folks, the fine wine market has been barreling ahead at such a rate as to attract the attention of the small screen.

This becomes quite a big deal. The reach of television is such that at a stroke thousands of people who might otherwise never have considered the asset class are now encouraged to at least make initial enquiries. Furthermore, television coverage confers a sense of security which also attracts potential investors.

What it’s all about of course is the rise and rise as expressed, for example, by the Liv-ex 50, whose relentless charge shows no sign of letting up. Typically, in a stock market context, such a rally could last quite a while. What most investors get wrong about markets is they guess on the turn. More money is lost guessing when a market is going to turn than in any other phase, and that is because markets move in long term waves, not staccato jerks. The most important thing to do when increasing or decreasing exposure to any given market place is to assure yourself that the market has turned, not that it is about to.

Here is the FTSE 100 going back to the late 70s.

Arguably the scale of the rises, even back in 1987 which now looks like a blip, should have bred the suspicion that the market was ripe for a fall, in the event of a catalyst. If you are a long term investor you ride the market until the catalyst(s) become too obvious to ignore, and you increase cash levels gradually in case your concerns prove well founded. But you never cash out completely because you would never know when to get back in.

I think there is little doubt now that the fine wine market has turned. For Bordeaux it has been a long wait, but then it was a pretty exotic ride up to 2011. Catalysts happen both ways, of course, as the China effect amply demonstrates on both sides of the coin, and the catalyst on the upside this time has not so much been the Sterling devaluation, welcome as that has seemed to the market. It has been the level of interest rates globally, the levels of cash sloshing around looking for a home, and the uncertainties created by world stockmarkets touching all-time highs in the face of myriad concerns.

At Amphora Portfolio Management we believe that we are still in the foothills of the next major move. The seeming sharpness of the rally results from the length of the consolidation period, and should not be off-putting. Over the last 10 years we have seen two remarkable rallies which amply illustrate the potential of the fine wine market to defy gravity once it has the bit between its teeth.

Critics may argue that the rallies in this chart had obvious stimuli, and whilst catalysts are often identifiable for moves of any magnitude, it is usually after the event that their impact becomes clear. We have argued for some time that if and when India reduces import duty on fine wine, currently 160%, there will be a move equivalent to previous bull runs, but absent something earth-shattering like that, what will sustain the current move?
Firstly, skepticism. Most people don’t think it will happen. Bull markets are famously born on pessimism and grow on skepticism, according to the great investor Sir John Templeton. Well there was pessimism aplenty from 2013 through to 2015, when we might argue the current bull run was born. Now we are hearing that the Sterling devaluation is a one-off, and won’t last.

That is nonsense, of course. It presupposes that all those who have bought since the referendum are the only people who are going to take advantage of the significant improvement in prices for foreign currency players. The more the market rises, the more people are attracted to it, and for anyone from the USA to Asia the fact that they are paying 10% or so less for their Sterling will continue to be an attraction.

We have also talked repeatedly about merchants’ stock levels. The inventory rebuild consistent with the return to favour of wines especially from Bordeaux has an ongoing impact on prices. Much of this leads to a self-fulfilling prophesy.

Now it is not necessarily beneficial for markets to go stratospheric, but the fine wine market has a habit of doing so, and we would argue that the risk is currently greater being on the sidelines than being involved.
As the market gyrates, however, we continue to unearth bargains. There are several amongst the bigger wines, and we would specifically highlight the Moutons and the Haut Brions from 2009 and 2010, where we believe the depressant effects of clumsy en primeur pricing is finally wearing off, and from further back the Latour 2003. On the Right Bank most Pomerols from 2008 look very attractive, and do keep an eye on Ausone 2009 and Pavie 2000.

Philip Staveley 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.