Storm Brewing
By Jeremy Howard, CEO & Co-Founder

Storm Brewing

  • Geopolitical tensions, plus soaring global inflation, have unnerved investors and caused a sell-off in risk assets across the world. 
  • In this note we consider how fine wine is positioned to cope with this uncertain backdrop.
  • We note that demand for fine wine exceeds supply by a record margin today, as private investors clamour to get into our product.
  • Private investors clearly think that assets like fine wine will protect better against inflation than riskier investments like technology shares.
  • Fine wine also has a strong track record of protecting wealth in a crisis (2007-08 and 2020).

Macro Risks are Increasing … What does it Mean for Fine Wine?

How will fine wine / spirits perform in the current heightened geopolitical and inflationary environment? We analysed the current market (plus its past performance) and draw three main conclusions:

  1. The supply / demand dynamic of fine wine is exceptionally strong right now,
  2. Investors are clearly betting that fine wine will be a good long-term inflation hedge; and
  3. Fine wine performs extremely well in times of genuine market crisis.

1) Global Demand for Fine Wine is at Record Levels

Demand for fine wine - measured by the volume of bids in the market - has never been stronger.

On the Lix-ex.com exchange, there are currently US$ 2 bids for every US$ 1 offered. This level of excess demand over supply is almost unprecedented: 

In such an environment, it is no surprise that fine wine prices are rising strongly.

Liv-ex.com’s data is corroborated by our own, where we also see bids on our platform at record levels:

It is virtually impossible for fine wine to fall in price in an environment where demand outstrips supply by such a wide margin.

The fundamentals of the fine wine market are clearly very strong, indicating that it is well placed to weather whatever squalls may be ahead. 

So, where is all this demand for fine wine coming from?

Our highest-net-worth clients are telling us that they are: a) very concerned about inflation, and b) looking to put money into fixed supply assets which have a long-term track record of storing value.

This means rotating out of riskier assets which are vulnerable to higher interest rates (like technology shares, cryptocurrencies etc.), and into things like gold and collectables (including fine wine / whisky) which are less interest rate sensitive and offer better long-term inflation protection.

This rotation has shown up very clearly in the price action since mid-2021:

3) Fine Wine Protects Wealth in a Crisis

Investors are also telling us that they fear there is worse to come for mainstream assets, either from geopolitical events, or from a possible recession caused by an old-fashioned energy price shock.

Fine wine as an alternative asset has been stress tested twice recently in serious market dislocations: in the Global Financial Crisis (2007-08) and again in the Covid-19 Crisis of Q1 2020. On both occasions, fine wine outperformed equity markets dramatically:

As we have written many times, fine wine is not purchased using borrowed money, and is unusual in having an alternative ‘use case’ (if it fails as an investment, it can be consumed).

These facts explain why (in our view) fine wine is rarely ‘panic sold’ and hence holds up so well in times of market dislocation.

Conclusion: Fine Wine is Now a Serious Alternative Asset Class

Private investors are voting with their wallets.

There has never been so much pent-up demand trying to get into our asset class.

This is causing a big demand over supply imbalance, which is squeezing up prices. This is also making fine wine one of the best performing assets in the world right now.

Given its ability to protect wealth when mainstream markets fall out of bed, fine wine looks like one of the most asymmetric bets in world markets today.

If inflation continues to gallop out of control, more and more investors will be looking for ‘fixed supply’ assets with low volatility, and there aren’t that many of those about! If fears turn more towards geopolitical risk, or impending recession (or both!) then mainstream assets could correct severely, once again making the downside protection characteristics of fine wine very useful in protecting wealth.

We therefore see fine wine as an excellent portfolio diversifier right now, and urge anyone concerned about the current market situation to consider whether they have a sufficient allocation to it. 


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