The global COVID-19 pandemic has caused significant social and economic upheaval, and commodity markets have not been spared either. But despite the ongoing coronavirus uncertainty, fine wine’s benefits as a stable investment option have held steady through it all. While global stock markets were crashing and interest rates were being slashed last year, top investors were turning to fine wine investment for its high potential and low correlation to the stock market.
According to industry experts, wine was one of the early winners of the COVID-19 lockdown, benefitting from increased purchases across segments. The fine wine market also expanded during the year, growing from 996 brands and 6,367 wines in 2019 to 1,420 brands and 8,734 wines traded in 2020.
In fact, in its 2020 year-end report, fine wine stock index Liv-ex concluded that not only had fine wine prices risen steadily, but the market had outperformed some of the top industry benchmarks, offering stability in a year of volatility. In the Power 100 rankings, the top fine wine performers registered price growth between 12% and 30%.
In a year of market swings, fine wine offered welcome stability
In March 2020, right at the onset of the pandemic, the S&P 500 fell by 25%. In the same month, Liv-ex 1000 slipped a mere 4%. Compare this to the double-digit losses suffered by most equity markets during the peak of the pandemicand you get an idea of the relative stability offered by fine wine investments.
The fine wine market regained stability after an initial stall and has maintained steady growth throughout the COVID-19 period. While global financial markets suffer from ongoing price swings, Liv-ex 100 recorded 6.7% growth over the 12 months leading up to March 2021. The benchmarking platformhas registered record growth levels in wine traded on the platform since May 2020 and is anticipating a strong 2021.
Fine wine has historically outperformed other assets
Industry reports highlight the strength of fine wine investment as a resilient alternative asset class. According to the annual Knight Frank Wealth Report, the fine wine market has grown by 120% over the last decade. It has been a top-performing asset especially during the past five years, performing well even during previous downturns.
For example, during the global recession of 2008, the S&P 500 plummeted by more than 38% whereas the Liv-ex 1000 dropped only about 10% from its peak in August. From December 2008, it began a slow but steady recovery, recouping all its losses by the end of next year.
The reasons behind fine wine’s benefits as an asset
Endorsed even by Warren Buffett, fine wine offers an attractive investment option at any time, but especially during periods of economic disruption, such as caused by the ongoing coronavirus uncertainty. These core features make it a valuable addition for portfolios:-
- Low correlation to volatile stock markets
- Has historically outperformed mainstream assets
- Delivers long-term growth and stability
- Offers attractive tax treatment or incentives
- Tangible and low-risk investment
How do fine wines present such promising investment value even amid financial storms? Experts offer a simple economic explanation. Fine wine prices are primarily determined by supply and demand. The finest of wines are an artisanal product and have a quite finite supply, which pushes up their value. Every time a rare bottle is consumed, the value of the remaining bottles gets an added boost. Demand has also generally been on the rise, especially in emerging markets of Asia, Africa, and Latin America.
Investment-grade fine wine also gets better with age. While the economic conditions caused by COVID-19 are unique, the fact of limited supply remains constant. So even if demand were to be temporarily disrupted, the medium-to-long-term prospects of the investment would hold out.
Another key factor here is that physical assetstraditionally do better against uncertain economic conditions. Fine wine has lower liquidity than most conventional asset classes; that is, they are harder to quickly buy and sell amid a market shock. This insulates them from panic selling. Consequently, their value tends to hold much steadier than those of liquid assets.
Further, a fall in the value of the British pound also works in favour of the fine wine investment market. Since the two major market indices are valued in sterling but most buyers are from other countries, a less valuable pound makes the market more attractive for overseas investors and acts as a boost for investments.
Making most of the fine wine market today
Thanks to COVID-19, the wine futures market presents an even better investment opportunity this year. Due to disruption in the usual flow of the futures market, wineries that are left with large amounts of unsold wine are expected to slash prices, much like they did after the 2008 recession. Seasoned investors can expect to have a bumper year, and for first-timers, there’s never been a better time to invest in fine wine.