Five years from market peak: a divided picture

There was an interesting article on the Liv-ex blog at the end of last week highlighting precisely the sort of thing we have been emphasising at Amphora over the last few years.

The article can be viewed here: Five years from market peak: a divided picture

Not only do markets of any depth never move up or down in a straight line, but it is crucial to understand how the constituent parts of any market place, the “sectors” if you like, combine to make up the whole.

As the article demonstrates perfectly eloquently, and as any investment advisor will stress, once having allocated funds to any particular investment arena it pays to make sure that the money is working for you as best it can. In the world of fine wine, if you have a time frame of 20 years, you can, hopefully, lay down your purchases and provided you avoid any howlers you can be assured of a comforting return. Most people, however, don’t operate on such lengthy time-scales.

At Amphora we tend to think in blocks of 5 years, partly because that gives enough time for investment strategies to evolve, and partly because it is a time frame that most investors can countenance. We happen to believe that it also gives investors time to double their money, which on a tax free basis is extremely attractive and more than a little unusual in the current investment climate.

Such activity as is happening at present is unfortunately not the norm. The Liv-ex 100 last month went up 3.6%, a fine move in index terms, and as we have been highlighting in recent notes, some wines are going up in leaps and bounds. Over the course of the last 3 weeks we have pointed out “bargains” or pricing anomalies in First Growths, Second Wines, and Superseconds. Such is the feeding frenzy at present that these are being snapped up with great alacrity, which may frustrate potential buyers but is just reward for the patient souls who have waited throughout the correction and consolidation for precisely this return to action.

This brings us to the focus of this week’s article. Our trawl through the sectors has arrived at the outperformers during the aforementioned correction, the wines from Tuscany, and the Rest of the World. Logically, having done so well between 2011 and 2016, we might expect these wines to be pausing for breath. This is perhaps why:

These two sectors helped pick up the slack left by the correction in Bordeaux prices, and if you had switched from Bordeaux into Italy and ROW sometime in 2011 you would have outperformed by the thick end of 50%. In simple terms, instead of watching your £1 turn into 75p, you would have seen it grow into just over £1.20.

Of course you might say that that is simple 20:20 hindsight, but I would argue very strongly that if you had made between 5-10x your investment in the run up to 2011, why on earth wouldn’t you have taken some profit? What sort of multiple were people expecting?

The following chart illustrates the point made earlier:

In other words, lay it down and wait by all means, but that is not the sensible way to make optimal returns. Judicious switching is, and Amphora clients know very well that since the middle of last year we have been increasing weightings in our balanced portfolios to Bordeaux wines, precisely those that have been outperforming so well of late. This is not investment genius. We wish it was. It is simply common investment sense.

So what have the Super Tuscans and the Rest of the World wines been up to since the referendum? Well, relatively little, is the answer. A cursory glance would suggest that Masseto 2003 is up 29%, however when the Liv-ex “market price” is £5,560 and you can buy a case from Patrick Wilkinson for £4,500, it is a reminder that everything needs to be cross-checked before acceptance as gospel.

Similarly the Opus One 2000, riding high at £3,210 for a rise of 20%. This wine achieved the somewhat derisory score of 84 from Robert Parker, and whilst the wine does indeed seem to be available at £3,210 it is incredibly thinly traded and under current circumstances should be regarded as an anomaly best left to itself.

In fact these two regions of the world are pausing for breath, an entirely normal part of the process. During this phase there may well be one or two genuine performers, but in general terms this phase could last for months, not weeks, and it pays to keep a close eye on proceedings.

As to how long the current rally will continue, it is as well just to remember a point made in last week’s note. One of the key drivers of prices in this market is consumption. Consumption obviously leads to scarcity, and is crucial to the supply side of the investment dynamic, but the consumer is supplied by the merchant, albeit perhaps indirectly, and if the merchant is seeing demand he will be buying to satisfy that demand irrespective of how high prices may seem to have risen in recent times.

When circumstances change, Amphora will change its advice. For now though we are happy to sail along on the good ship Bordeaux.

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