Outlook for fine wine and the wider markets
The economic and financial market outlook remains challenging to say the least, with risk of recession in the US and other Western economies growing. Ongoing cost-of-living concerns mean central banks face the twin challenge of keeping inflation in check while supporting growth. Although they will tread carefully, the prospect of monetary policy tightening dampens hopes of a quick rebound in financial markets.
Despite its strengths, we recognise fine wine will not likely remain entirely immune forever. Fine wine’s recent soaring growth (Liv-ex 1000 +29.3% since beginning of 2021 through April 2022) would be difficult to maintain under any circumstances, and demand for fine wine could moderate as caution seeps in amid the gloomy economic picture.
However, we believe a selloff is unlikely and that fine wine market can maintain its relative stability to financial markets due to several supporting factors:
I. Inflation can exert upward pressure on fine wine prices as wine, at its core, remains a consumer product. While inflationary pressures aren’t ideal for consumers purchasing wine for near-term consumption, those holding wine stocks benefit from higher returns should prices climb over the longer term.
II. Lower liquidity – Fine wine is a less liquid market than equities, bonds, gold, and cryptocurrencies. Assets that cannot typically be sold as quickly amid a market shock helps insulate them from sharp selloffs. Consequently, fine wine can form a more reliable store of value than highly liquid assets.
III. No leverage – As a real asset, fine wine investments do not involve leverage, avoiding situations when investors are forced to sell during down markets, causing prices to drop further.
IV. Foreign exchange backdrop – A strong dollar relative to the pound and euro boosts the purchasing power of US buyers, making fine wine (typically denominated in pounds and euros) more attractive for this large market.