The course of fine wine investing has not run smooth over the last decade, but, given talk of a potential turn around, the one thing potential investors might like to have to hand is a leading indicator. At its most basic, a leading indicator can be described as a measurable economic factor that changes before the chosen investment or economy starts to follow a pattern or trend.
Housing statistics, building permits and consumer goods orders are, for example, considered leading indicators for many developed and developing economies. Copper prices have been used as a leading economic indicator, hence the nickname Dr Copper. Meanwhile, bond yields are used as a leading indicator for the stock market because, in very basic terms, bond yields going down mean bond prices are going up, indicating an increase in the demand for bonds, which generally points to the fact that people are scurrying out of the stock market and into the relative safety of bonds. Or vice versa.
Fine wine markets can be linked to all kinds of trends, often economic – with the basic trend being a better economy equals more money to spend on wine. But there’s no clear consensus among investment advisors on whether reliable leading indicators exist.
Interest rates or gold?
In the US, Jennifer Williams-Bulkeley, founder of AOC Investment Advisors, believes interest rates can do the trick. Looking back over the last few years, she says, low interest rates have resulted in low-cost capital, fuelling rallies in equities and bonds, and driving strong performances in the FTSE and the S&P, which have outperformed hard assets like housing, commodities, art, wine and cars over the past three years.
As the chart WO Gold, S&P and FTSE shows, the Wine Owners (WO) 150 – a US fine wine index – has underperformed versus equities over the last two or so years. On the upside, the WO 150 has outperformed gold as money from that ‘risk off’ hard asset, often easier to sell than wine, appears to have flowed into equities. Looking forward, however, there are signs both the Bank of England and the US Federal Reserve might raise rates in the first quarter of next year.
“Interest rates increasing is a signal the days of easy money may be behind us and that the government believes the economy is stable enough to allow markets to set the cost of capital,” Williams-Bulkeley says. If so, capital looking for relative returns, given the current high cost of entering those outperforming financial markets, may turn to “real assets” as a store of value, as a hedge against inflation and a diversification play. At that point, Williams-Bulkeley believes, if the economy has improved to the point where consumer discretionary items and investments of passion are supplemental to the overall investment landscape, fine wine prices will rise as more investors seek to buy.
As well as interest rates, she includes in her list of leading indicators: a stable economy; the supply and demand balance, particularly with consumers beginning to open the two most recent investment vintages, 2009 and 2010; the fact that returns in wine are currently well below other assets, creating a value play; plus rising global demand for wine and a generational focus on agricultural products and provenance.
With that in mind her view looking forward is that demand for fine wine will rise, tracking interest rates, over the next 12 to 24 months. It should then follow the traditional five to seven year cycle, she said, with investors obviously taking into account the relative quality and value of the different vintages on the market, as well as their relative value to each other.
In the UK, the outlook on an expected market turnaround is also fairly positive, but the view on the existence of leading indicators is downbeat. Investment manager for The Wine Investment Fund, Chris Smith says they have looked, but never found, a reliable one.
“We’ve looked at gold and it has similarities in that there is a limited supply and it’s fairly static. There are linkages and correlations, but we’ve never found a leading indicator,” he said. “Other things seemed to correlate for a while, like the Japanese stock market, but then they break down. The number of billionaires globally, that was a slightly leading or correlating indictor for a while, then it broke down.”
Currency trends are however worth keeping an eye on, Smith said, for the simple reason that all the main fine wine indices are in sterling, while the main buyers tend to have dollars or Asian currency, which is influenced by the dollar. “If Chinese or US currencies strengthen, you can buy more wine for your money, or you can pay less for the same wine, so dollar strengthening tends to be good for the wine market.” On the other hand, if the euro is weak, then it’s cheaper to buy from Europe, so a weak euro can have a negative effect on the main sterling indices.
Looking back over the last 18 months Smith noted the recent softening of sterling in August, on uncertainty around the Scottish referendum, could be linked to an uptick of 1% in the main Liv-ex 100 index. “But people are also saying the market is ripe for an upturn, so is it that or the currency? It’s too soon to tell really.”
As to the positive sentiment around that August uptick, Smith warned against getting unduly excited about a possible turnaround in the fine wine market yet. “The Liv-ex 100 has been down about 35% from its peak in mid-2011. And there has been 16 negative months in a row since then. So people got quite excited about the August upturn.” Whether that continues remains to be seen. (As of the end of September the Liv-ex 100 looked to be all but flat, bearing out Smith’s caution.)
Politics and regulatory issues can also affect markets, plus anything that happens in China. Therefore the recent Chinese austerity crackdown was something of a double whammy. Smith felt, however, that a lot of the austerity clamp down effect should have played out by now.
More present as an issue, he said, echoing Williams-Bulkeley but offering a deeper business take on the situation, are supply and demand issues. “There are some big sellers out there, funds that are waiting to liquidate. And there are people sitting on piles of cash, like other funds or merchants,” he said. In the downturn, merchants became more cautious, acting, in the last two to three years, more like brokers and buying only if they have a buyer, rather than taking market positions. With such factors in place, he said, if and/or when the market turns, it could all happen very fast.
Other correlations
Another UK fine wine expert, Liv-ex’s Head of Data, Neil Taylor, agreed there was little in the way of leading indicators, saying he’d not found anything obvious. Looked at another way, he said, the fact that wine does not correlate with other investments makes it a good diversifier in a portfolio. Other factors, he agreed, were regulatory, such as China or the introduction of the Hong Kong tax-free wine import zone. Plus, of course, there are the particular vintage characteristics and, he said, the fine wine calendar itself, where events such as the release of Bordeaux’s en primeur prices, or other fine wine releases can have an affect.
Then there’s the role the critics play, with Robert Parker being one of the clear market movers – as per his recent effect on the price of Montrose 2010, which he’d scored as a 99 point wine in February 2013. On August 29th, however, having re-tasted it, he released an upgraded score of 100 points. The result was a sharp price rise from a trading level of about £1,184.00 ($1,891.00) per case to £1,380.00, moments after the upgrade was released, then to £1,650.00 a few hours later. Commentary after the event however reveals that it was not just Parker’s score that made the difference; it was a combination of that and the fact that Montrose 2010 is still seen as undervalued compared to Montrose 2009, which had a 100 point score from the outset and can trade closer to £2,000.00 a case.
However, unless it became possible, several days or weeks before publication of the new scores, to break into Parker’s computer or house and steal his data, or render him insensible with drink so that he reveals his scores, this could not be described as a leading indicator either.
Emerging markets?
Finally, and at an altogether more academic level, there are a range of fine wine price studies from organisations such as the American Association of Wine Economists (AAWE) or the International Monetary Fund (IMF). However, fascinating as the AAWE paper on ‘The Price of Wine’ is (published September 2013 and written by Elroy Dimson, Peter L. Rousseau and Christophe Spaenjers) it does not identify any leading indicators per se. And nor did Karl Storchmann, the managing editor of the group’s Journal of Wine Economics. In fact his exact reply to the e-mailed question was: “I don’t know any leading indicators for fine wine prices. If I did, I would use them myself :-).”
Meanwhile, an IMF paper titled “A Barrel of Oil or a Bottle of Wine: How Do Global Growth Dynamics Affect Commodity Prices?” caused a bit of excitement in the wine world a few years back, mainly because it suggested a link between emerging market economic growth and higher fine wine prices. It argued that although advanced economies account for more than half of global oil and wine consumption, emerging markets make up the bulk of incremental change. They therefore have a greater significance in determining price fluctuations.
The paper, published in January 2011, said that according to the authors’ calculations, “a one-standard-deviation decline in industrial production growth in emerging market economies (or 4 percentage points) would induce a 22% decline in real crude oil prices and a 15% fall in real wine prices.”
This would seem to apply to China, in hindsight at least, where GDP growth dropped about 2% between 2013 and 2011, corresponding reasonably well with the drop of 35% in the Liv-ex 100 between the mid-2011 peak and now, so it’s a useful one to remember.
