Fine wine: A physical passion asset that can shine in inflationary times
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Central banks around the globe are aggressively rolling out quantitative easing measures to help their economies recover from the Covid-19 pandemic. The excess money supply, coupled with labour shortages and supply chain disruptions due to lockdowns, drive inflation to multi-year highs. Rising prices are the most prominent in the US and Europe, yet Asia is not immune from inflation in an interconnected world.
For example, in Hong Kong, the overall consumer price index (CPI) jumped 3.7% year-on-year in July 2021, the highest level since August 2016. The latest figure was 1.7% in October, compared to 1.4% in the previous month. Singapore’s CPI is also on a rising trend, with October seeing a 3.2% year-on-year increase, from 2.9% in September. Although equity markets continue to rise, inflation surprises have triggered bouts of volatility as investors gauge possible shifts in monetary and government fiscal policies.
In this environment, real assets, such as fine wine, can shine.
“Inflation is hitting multi-year highs in several major economies in late 2021. This is causing more uncertainty in financial markets as central bank policy could shift faster than expected,” says Tom Gearing, CEO & Co-Founder of Cult Wines, the world’s leading fine wine collection management and investment company. “As a physical passion asset, the primary drivers of fine wine prices are internal factors, namely limited supply and persistent demand through different macro backdrops. Fine wine is, therefore, less susceptible to changes in the inflation or policy than many other financial assets.”
An alternative investment for better returns and inflation hedge
Indeed, fine wine can provide an excellent long-term hedge against an uncertain inflation outlook. Fine wine has delivered positive real returns over the long term, meaning it has outperformed the International Monetary Fund’s (IMF’s) worldwide CPI inflation rate. Figure 1 shows the Liv-ex 1000 fine wine index, the broadest measure of the market, compared to worldwide CPI going back to 2003. Figure 2 makes this same comparison using the Fine Wine Investables Index. This more concentrated index of around 200 wines from 24 top Bordeaux chateaux can experience more short-term volatility than the larger Liv-ex 1000 but forms a useful tool to see how fine wine performs over the longer term as it has data going back to 1988. Both charts clearly show fine wine delivered consistent returns above the rate of inflation.
“Historically, the wine investment category has been perceived as only for the wealthy, or those with considerable wine knowledge,” Gearing shares. “We know this is not the case. It has become an increasingly popular investment asset among the general public, especially as the low-growth, low-rate yet high-inflation environment has left many investors to seek out alternative investments for better returns and to hedge against inflation. Investing in wine is one such investment that is garnering international attention .”
He thinks the case for incorporating or expanding an allocation to alternative assets is stronger than ever, with collectible passion assets providing an antidote to many of today’s investing challenges.
Wine investment: three reasons why to partake
As we enter a period of higher inflation, fine wine continues to be a great option due to its unique market dynamics. The short-term wine prices may not spike just because inflation leaps higher but instead, offer a long-term hedge against it due to a few key factors:
Collectability: Wine is considered a passion asset that has supply/demand, brand popularity, and wine quality as primary driving price factors. Hence, fine wine is less vulnerable to the overall economic situation compared to other financial assets. During the last high inflation environment during the 1990s, wine prices were stable and we are seeing this same situation play out in the current inflationary period.
Supply and demand imbalance: Much like gold, the supply levels of fine wine are finite and constrained. Only certain vineyards in specific wine-growing areas have the ideal qualities and reputation to produce the top-quality wines worth investing in. This element of scarcity combined with the passion aspect of a collectible luxury product like wine helps keep its price competitive and consistent regardless of the current macroeconomic situation. Again, using the 1990s as an example when CPI inflation averaged 8.8%, fine wine investment saw some its greatest returns (e.g. the Liv-ex index produced an average return of 50% from 1994-1996).
An economy primed for recovery: While we have been battling the Covid-19 pandemic since 2020, the worst part seems to be over in terms of economic damage. 2022 is expected to be a year of normalisation as vaccine programmes continue to roll out and therapies become more effective. The economic recovery as economies reopen should prolong the current fine wine rally. In addition, the US tariffs on EU wine imports were stopped recently and the UK removed the expensive restrictions for all wine imports. This will only add to the global demand for fine wines, propelling returns even higher for investors.
Technology has made wine investment convenient and easily affordable
Technology has helped investing in wine much easier than in the past.
“At Cult Wine Investment, consumers can buy, sell, invest and collect fine wines on digital platform supported by data-driven technology and globalised infrastructure. Anyone from experienced investors to wine lovers to novice investors can build a customised collection of investment grade wine and start enjoying enriched benefits immediately. Providing greater accessibility to the asset class, the investment threshold has also been significantly lowered. Clients can now build a rewarding wine portfolio starting from HK$100,000,” Gearing says.
“Wine is also an enriched investment. This means that investing in wine is much more physical, tangible, and socially and culturally enriching than say a share of a company or a digital coin. A wine investment is a more interesting thing to talk about over dinner, and provides a chance to dive into the rich heritage, history and culture of wine. This is the joy of fine wine - and the pleasures of a wine investment,” he adds.
Fine wine offers a nice alternative to the popular, volatile, and confusing assets of today with stable, profitable, and enjoyable attributes. Wine has been around since the dawn of man and will be here long after we leave. Why not try and make some money from this time-tested tradition?
*Past performance is not indicative of future results.