Fine wine investment: opposite reactions

Fresh from an hour on the phone with a journalist from Kuala Lumpur enquiring about the attractions of the fine wine investment market, it is clear that Amphora Portfolio Management needs to add Malaysia to its itinerary on a more regular basis.

This was only a matter of time, with the fine wine market outperforming most alternatives (if not all) over the past year or so. As we have explained in earlier notes, once the bandwagon starts to roll its influence can extend across a pretty broad front. Yet fine wine is hardly unknown in Malaysia. On that earlier trip we were lucky enough to meet one gentleman who not only owned a château in Bordeaux but also treated us to not one but two wines from his own estate.

This is of course a further reminder of the list of potential new buyers of fine wine as developing economies continue to grow. Asian investors don’t need geo-political crises as an excuse to invest in physical assets. They habitually buy gold and diamonds as stores of wealth, and are starting to appreciate the qualities of fine wine on exactly the same basis.

The fine wine market has several external influences tapping at its door at present, so we thought it worthwhile to look at one or two, starting with the nascent geo-political crisis, the stand-off between the USA and North Korea which has been such a contributor to the gold price rally recently.

Typically mainstream markets prefer stability to the sort of uncertainty engendered by the possible onset of World War III. Investors cast around for a safe haven and invariably gold has its time in the sun, being a large enough market to accommodate significant flows. Volatility increases in stock markets especially after the rallies we have been treated to in recent months, and people hunker down until the storm has passed.

Then we have sterling, which has firmed up over the last few weeks. This is an interesting one because there were a lot of people back in the summer who said that the weakness in sterling was all that was propping up the fine wine market. At the end of 2015 it was the strengthening euro, according to similarly-inclined commentators, that stood between the market and declines.

Amphora disputed both claims at the time, and we do so again now. Sterling bottomed against the US dollar six months ago and has firmed up ever since. The Liv-ex 1000 index is up 7% over that period. The performance of sterling certainly signifies, particularly if you are a foreign investor, but is not the only influence; we would argue not even the most important.

There will be fluctuations in stock markets while military muscles are flexed, as there will in currency markets in the run up to 8 June, so what to do in the fine wine market?

The key message we pick up on our travels is how new the world of fine wine investment is to a vast percentage of our audience. This means that there is a catalogue of potential new interest ‘out there’. This new interest will be influenced by a variety of factors, no doubt, but it will have an impact as it enters the market place, and we should remember that this is, in relative terms, a small market place.

One option, which we believe makes sense, is to use times like this to diversify an investment portfolio to moderate perceived risks in mainstream markets. Anyone with no fine wine exposure at this point might do well to consider opening their account. Not only would they be participating in a vibrant current market place, but they would also be picking up a physical asset which could add comfort through more troubled times.

Over the next few weeks the en primeur pricing for 2016 will emerge. 2016 is such a good vintage they’ve even been reporting the fact on the Bloomberg channels. In recent years commentators have worried that clumsy pricing would a) stymy an incipient rally, (2013-2015) or b) torpedo the established rally (2016).

This year confidence has been restored to such a degree that we can suggest that elevated pricing of the 2016 en primeur offerings will reinforce the value resident in more recent releases, and it is interesting at present that the Amphora proprietary algorithm is highlighting a lot of wines from 2011 and 2012 particularly.

Going out on a limb Amphora wonders if Lafite 2016, for example, will emerge around the high £5,000 mark, possibly even £6,000. In such a case we believe there will be a pleasurable impact on many of the back vintages, starting with the highly creditable 95 point 2014 which you can currently pick up for £4,600.

We believe that this is going to be a very interesting en primeur season, but one which will energise the rest of the market, rather than debilitate it. This is not to say that the vintage will be priced correctly, and certainly not cheaply. Quite the reverse, but such is the market’s improved psychology that the impact will likely be positive either way.

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.