My view on the current fine wine market: How to profit in downturns
Over the past nine months, the fine wine market has seen a small decline according to the Liv-Ex Fine Wine 1000. It is well-known that fine wine is a long-term investment with a strong diversification profile. In this article, our Senior Portfolio Manager Matt Small offers his perspective on the current fine wine market downturn, and as history indicates, explains how this is a good opportunity for investors to take advantage of market conditions.
The economic definition of a bear is defined by a prolonged drop in investment prices — generally, a bear market happens when a broad market index falls by 20% or more from its most recent high. The broad based wine investment benchmark index, the Liv-Ex 1000, is currently down 12.6% from its peak in November 2022. Although the current correction in the fine wine market doesn’t qualify as a bear market, it presents a good opportunity to analyse previous fine wine market down-turns.
If we look at the Liv-Ex 1000 chart below, since inception we can see there have been four market downturns since January 2004. In this article, we are going to look at each individually, focusing on;
- The cause of the correction
- The magnitude of the correction (% change in index from start of downturn to its lowest point).
- The length of the correction (time taken from start of the downturn to reach its lowest point)
- The magnitude of the rebound (% change in index from lowest point of downturn to peak of next ).
The first correction was the 2008 financial crisis, caused by a fall in US house prices and a large sub prime mortgage market concealing bad debt. The fine wine market entered the downturn similar to the traditional market in August 2008. The downturn in the Liv-Ex 1000 lasted 17 months and declined 10.5% in its peak. If we compare that to the S&P 500, you can see that the impacts of the crisis were more severe, with S&P 500 losing 42.7% of its value in the peak. The Liv-Ex 1000 then rebounded 45.2%.
The 2008 crisis highlighted fine wines low price volatility and low correlation to traditional markets. Fine wine still exhibits these traits today on both a one-year and five-year time horizon.
|S&P 500||Liv-Ex 100||Liv-Ex 1000|
|1-Year Standard Deviation||17.6%||3.9%||2.7%|
|5-Year Standard Deviation||18.5%||4.5%||4.3%|
|vs. Liv-Ex 1000||S&P 500||Gold||Real Estate|
|1-Year Correlation Coefficent||-0.041||-0.181||0.005|
|5-Year Standard Deviation||-0.061||-0.048||0.051|
Source: Liv-ex.com, November 2023
The trigger for the second down-turn was two-fold. The market was running hot with the 2010 Bordeaux vintage priced at a 13% premium to the previous year. American buyers with their cellars recently topped up with a strong 2009 vintage and recovering from the 2008 financial crisis withdrew from the 2010 campaign. Secondly, China announced a crackdown on gift-giving of luxury goods among government officials. This sudden halt in Chinese and American demand saw the Liv-Ex 1000 index drop 13.2% at its peak with the correction lasting 14 months. The Liv-Ex 1000 then rebounded 43.2%
In downturn number two, it is important to highlight that the Liv-Ex 100, which has a higher Bordeaux weighting than the Liv-Ex 1000, was down 29% (vs 1000 down 13.2%). This second downturn was symptomatic of an immature market which lacked diversification. In 2011 circa 95% of all wines traded on the Liv-Ex exchange were Bordeaux (currently Bordeaux comprises 35-40% of trading volume). This is why the more diversified Liv-Ex 1000 index dramatically outperformed the 100 in this downturn and highlights the importance of regional diversification to reduce portfolio risk.
Downturn number three was due to a sideways market which culminated in the world entering the COVID 19 pandemic. The Liv-Ex 1000 dropped 6.5% at its peak.The magnitude of the rebound was 40.7%.
|Correction||Magnitude of Correction||Length of Correction||Magnitude of Rebound|
|1 – Financial Crisis||10.5%||4 months||45.2%|
|2 – 2010 Bordeaux||13.2%||14 months||43.2%|
|3 – Covid-19||6.5%||16 months||40.7%|
Source: Liv-ex.com, November 2023
Downturn number four and the current downturn began in November 2022. The cause of the correction is three-fold:
- Higher interest rates: The increase in the risk free rate (central bank rate) has increased the opportunity cost of investing in wine. i.e. An investor decides between a guaranteed return of 5% with no risk, or fine wine which has averaged 7.2% over the long term which equates to a risk premium of 2.2%. When interest rates are lower this risk premium becomes more attractive. The Bank of England have just announced they are open to rate cuts in 2024 with the markets pricing in 0.75% cuts next year.
- Strong Sterling: The fine wine market is predominately priced in Sterling. The more expensive Sterling is, the more expensive fine wine is to Non-UK residents which is the majority of the market. We saw the cable (GBP/USD) raise from $1.11 in October 2022 to $1.28 in July 2023. Leaving all other things constant, a US investor would have to pay a 15% premium due to FX. This currency head-wind has since reduced with the cable now at $1.23. As things stand, the Bank of England are indicating rate cuts in 2024, and without similar indication from the FED, expect the cable to fall going into next year creating a tail wind for fine wine.
- Economic Growth: Due to rising inflation, central banks have been forced to increase interest rates. This increase in interest rates comes at the expense of economic growth. When economic growth is low consumers have less confidence to spend on luxury goods. The International Monetary Fund (IMF) is expecting global economic growth to bottom out at 2.9% in 2024. The UK and USA also both expect growth to bottom out next year while remaining positive and avoiding a hard landing recession. Europe is expecting to grow in 2024 driven by an increase in purchasing power.
The current downturn has lasted 11 months and the Liv-Ex 1000 has decreased 12.6% in this time frame. Although too early to suggest the bottom of the market, the economic forecasts and previous down-turns, which have averaged a 10% drop and a duration of 11 months, suggest we could be near.
As history indicates, the current market conditions present an attractive buying opportunity, with the average rebound returning 43% to investors. To best take advantage of the current market conditions we advise investors to do the following:
- Cost average: It is very difficult to perfectly time the market, so dividing your capital into segments and buying along the dip, reduces timing risk and allows the investor to cost average down their investment.
- Value investments: Focus on fine wines which have strong fundamentals (brand, critic score and vintage) and have seen a significant decrease in value from their all-time-highs. When in a downturn, speculative up-and-coming producers – otherwise known as growth investments – tend to underperform.
- Long-term investment horizon: Since the inception of the Liv-Ex 1000 in Jan 2004 we have seen four corrections with the average correction down 10.4% with the average rebound returning 43%. To take advantage of these market cycles a 8+ year time horizon is advised.
- Diversify: It is essential that your wine portfolio is diversified and weighted to meet your risk and return requirements. As we saw in the 2011 market downturn the increased diversification of the Liv-Ex 1000 helped the index outperform its more focused Liv-Ex 100 index.
If you are interested in finding out more information on how to take advantage of the current market conditions, book a free consultation call with Matt today using the button below.