The price of money

One of the idiosyncrasies of the fine wine market, as opposed to most other globally traded markets which are denominated in US dollars, is that it is traded in pounds sterling writes Philip Staveley.

This dates back to when the first Berry brother was a lad, and simply results from the fact that London has maintained its position over the centuries as the number one market around the world for fine wine transactions.

This has very important consequences as activity has picked up globally, because prices for consumption, ‘collection’ and investment, not to mention wine investment returns, are all directly affected by the performance of sterling in the currency markets.

Let’s take the evidence of the last two months as an example. Having more or less trod water (with a slight upward bias) over the prior 15 months, the first growths led the market into a rather gruesome dip between 2 October and 20 November. As is usual at times of unusually volatile price activity, market participants cast around for explanations. Where was the selling coming from? Was there much volume behind it? When would it end? What was the cause?

Our own researches at Amphora led us to the conclusion that the sharp appreciation in the value of sterling against the euro may have been in no small part responsible. Imagine the plight of the Bordeaux négociants in recent times. Sitting as they are on cases of unwanted en primeur accumulated over the last few years, many need to raise cash when they can.

Bids (in sterling) are going nowhere in any particular hurry, but suddenly the value in euros of those bids starts to rise as sterling appreciates against the euro. A case bid for at £1,000 is worth €1,354 on 2 October, but by the 20 November that has risen to €1,427, without the underlying bid having moved at all in sterling.

Evidently much of the fine wine selling at that time did indeed come from Europe, and we believe that this was the reason. Sure enough, the short term peak in the euro sterling rate coincided with the short term trough in the Liv-ex 50, and the reversal of fortunes in both markets is an almost exact replica, as can be seen from these two charts.

Here is sterling against the euro;

And here is the Liv-ex 50.

Currency movements are hugely important when it comes to making investment returns. If your underlying currency is, say, the Indian rupee, and over the course of your fine wine investment the rupee depreciates by 30% against sterling, then obviously that’s an additional 30% you have made over and above the movement in the underlying investment itself.

From the perspective of the fine wine investor it also makes very good sense to try and understand in which parts of the world other investors, and consumers, live, provided, of course, that they are significant players in the market place. You can have the best forecast imaginable for the Polish zloty but that is of little help if no-one in Poland drinks fine wine.

Originally fine wine tended to be the preserve of the well-heeled in the UK and the US, to a far greater extent than elsewhere in Europe, however over the last 20 years the Far East, first in the form of the Japanese, then over the last decade, the Chinese, have taken important seats at the table. But first, can we discern anything from exchange rate movements with the US?

I think it is fair to say that nothing in the way of currency movements would have interrupted the selling of first growths during the first year of the correction from July 2011. From the end of 2012 however, until mid 2013, we saw quite a substantial rally, and it is interesting that this coincided with significant appreciation of the USD against sterling. The charts measuring this and the movements in the Liv-ex 100 make for an interesting comparison:

From its 2013 high to its 2014 low, we can also see a weakening of the USD against sterling; then both the Liv-ex 100 and the USD seem to bottom at the same time. If we wish to read a lot into this, we can picture a decent rally in fine wine prices resulting from what is currently a very strong USD.

It is also worth bearing in mind that certain currencies which may have a part to play in this are linked to the USD, the Hong Kong dollar, for example. There is a lot of anecdotal evidence to suggest that the wine market’s stratospheric rise was caused by HK-based speculators, betting on never-ending demand from China. Certainly HK-based merchants are key suppliers to the mainland market, so it helps them to see a stronger USD against sterling.

Nor would it be sensible to ignore Japan. As the drinks business highlighted in its interview with Opus One CEO Dave Pearson back in 2013, Japan accounts for 35% of the exported production of Opus One. That is a staggeringly high percentage. Having spent quite a lot of last year worrying the Yen200/£1 level, the yen firmed up substantially to 165 last week, before easing back to 168.

The questions are, does this firmer yen lure investors and consumers from that part of the world back to the market place, and are HK merchants’ stock levels now sufficiently depleted to enable them to make the most of the benign exchange rate?

Fine wine charts courtesy of Liv-ex.

Currency graphs courtesy of xe.com

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. www.apmwineinvestment.co.uk