Fine wine investment: the value of confidence

You certainly can’t accuse Amphora Portfolio Management of not trying to spread the word. Two Directors went on an extraordinary whistle-stop tour a couple of weeks ago taking in, within the space of a single week, Beijing, Tianjin, Shanghai, Guangzhou, Hong Kong, Taipei, and Kaohsiung.

Amphora clients know that the company has been treading these boards for the last five years, so it has built up a fair degree of local knowledge over that time. The interesting thing currently is that the level of interest in the market is off the scale.

Back in 2012 on early trips we were trying to relay the Warren Buffett approach. “Come on you guys, everyone hates Bordeaux, so now is just the time to buy”. No bandwagon. No sign of one. No dice.

We have no doubt that a variety of things within the Chinese economic and domestic regulatory context have conspired to alter the ante, but now is not the time to examine those in any particular detail. What is undeniable though is the change in complexion a rising market has brought about.

There is a key difference for those of a shorter time horizon wrought by a rising market. Abstinence means missing out, and no-one likes to miss out. So much, so obvious. It’s everyone else making all the money and that hurts.

The key question regular market watchers ask at this point is how long the current rally can last. Perfectly normal question, but it is at times like this that the brick wall representing the absence of intrinsic value makes its presence felt.

In most mainstream markets you will be able to read endless commentary about P/E levels and other market valuation metrics, but these are all predicated on things like earnings and cash flows, things noticeably absent from markets that offer no fundamental value (all the commodity markets, for example). Remember that fundamental, or intrinsic value, is not the same as utility value. Clearly all commodities have utility value.

If you can measure fundamental value you can judge a market’s position within its historic range. Banks are typically measured on the basis of “price to book value”. At times of crisis the market might only pay 50% of the perceived book value for a particular bank, perhaps because it perceives threats from things like a bad loan book, for example. At other more benign times the price for a bank might be a multiple of the book value, and so you can measure the current value within a historic context, and this offers investors a measure of comfort, or otherwise.

What to do if there is no fundamental value, and therefore nothing to judge from but a historic absolute price range? If 10 years ago the gold price was US$650, went up to US$1,750 at the height of the financial crisis, and now sits at US$1,250, is it a buy or a sell? From an investment perspective it all depends on your view of global economic conditions, with gold bizarrely viewed as a safe haven investment.

You do occasionally read articles about the use of gold as the key component in jewellery, but there is no correlation whatsoever between the market price for gold and any increase or decrease in its use for that purpose. It doesn’t respond to any of the drivers normally associated with consumption of luxury goods, like burgeoning global economic growth. Unless of course the rise from $650 to $1,750 was more reflective of escalating Chinese GDP than the onset of the financial crisis, which is an interesting thought, although not a seriously espoused view, as far as I am aware.

There are countless differences between gold and fine wine, obviously, but one highlighted in sharp relief reappeared on this recent trip to China. Everyone knows the gold trade. By everyone, I mean every single high net worth investor IN THE WORLD. And there are a heck of a lot of people who know nothing at all about the fine wine trade.

Last week your correspondent was in Singapore and Hong Kong. Goodness we do get around. These are highly sophisticated environments where people have been drinking and investing in fine wine for years. In Singapore’s case you can measure it in decades. What was significant on both the China trip and last week’s trip was that there is a vast number of newly or recently-minted wealth for whom fine wine investment is a fascinating new game.

Bull markets are built on liquidity and confidence, not, value, which may be a surprise to some. Bull markets tend rather to presage improving value, than reflect it. In the fine wine market we have no intrinsic value, but we have confidence arising from 18 months of rising prices, and liquidity resulting from the introduction of waves of investors for which this is a brand new thing. We are not arguing that the good times will last forever, but we do think the markets have plenty of upside from here.

We started the year with a model portfolio against which we hoped to measure up our recommendations. After three months the Liv-ex 50, 100 and 1000 are all up less than 2.5%, perfectly good start to the year actually. The model portfolio is up just over 5%, so looks pretty healthy too. As is typical of diversified portfolios, the majority of constituents are up a bit, but the extra kicker has come from a small handful of outperformers. We are not quite yet of a mind to take profit on these outperformers but are watching closely for the precise time to do so.

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 with Amphora.