Investing in Wine

Picking the Right Investment

Between 1980 and 2000 just about everything that could go right for equity investors went right. Since 2000, just about everything that could go wrong has gone wrong. Going forward, the question is; how can a standard investment portfolio predominantly consisting of equities and bonds be improved? What kind of assets will perform well in the current and future economic environment, and should therefore form a part of any portfolio?

1980 – 2000: Perfect Equity Environment

If one had invested in the US equity market in the late 1970s and held that investment for the subsequent twenty years, that investor would have seen a return on investment of 12.8% per annum. The returns on the UK equity market were about the same. But what exactly made equity investment so attractive during this period?

In the late 1970s, to fight inflation bond, yields started at a generational high. For the next twenty years, as central banks took more and more control of inflation moderation, bond yields dropped consistently, making the investment environment for equities increasingly interesting.

Labour markets were de-unionised and became subsequently more flexible. Global outsourcing provided an almost unending supply of effective and cheap global labour, unemployment fell, productivity increased and demographics were supportive. In addition to that oil and most raw materials were cheap, and household and government borrowing was generally low. As a result, investors saw fantastic returns from equities over this period and the“buy-the-dip” mentality became a legitimised investment technique.

Since the turn of the Millennium

Over the past twenty years, central banks have consistently lowered interest rates at the merest hint of weaker growth. Governments and households were encouraged to borrow more and more and a mentality of spending today what one might earn tomorrow became commonplace. Now interest rates are at almost zero, governmental debt is spiralling out of control and the further stimulus of reducing interest rates even further is not an option any more.

In this situation, in order to boost growth governments and central banks turned to the unconventional monetary policy in the shape of quantitative easing.

Given this backdrop, it is perhaps unsurprising that investors have been looking to other areas for better returns. Property has naturally soaked up a large portion of this demand (though of late this is a dangerous area itself) with some investors favouring precious metals, art, classic cars and of course, investment wine.

The Investment Wine Market since 2014

The investment market for a long period up to 2010 was very good as noted above. This was followed by an overheated market driven by astronomic pricing of the very good 2009 and 2010 vintages. In 2010 Chateau Lafite was released at £12,200 per case and in 2013 this had reduced to a still unrealistic price of £3,250 per case for a wine in a very average quality year. Following the disappointments of the 2011 to 2013 vintages for the growers and investors alike, there was great optimism about the sensibly priced 2014 wines, which have so far proved good investments as they were released at sensible prices at last.

Following the classic vintage in 2014, there has been an extraordinary run of form with classic, very good or excellent vintages back to back – which is unprecedented. In 2015, we were rewarded with a very good vintage, with prices creeping up from 2014. In 2016, this was arguably one of the finest vintages in a lifetime, with the critics giving top scores across the board. In 2017 – another very good year, similar in style to 2015. With 2018, another very well regarded year with scores just below 2016. Our concerns at this point were about the continuous rise in release price and the effect on the investment upside opportunity over time.

For the 2019 campaign, we had just fought off Brexit negotiations, when we were hit by the global COVID-19 crisis. During this crisis, the Bordelais had another fabulous wine year – in the style of 2015 and 2016. Surprisingly, the Bordelais saw sense and dropped their prices accordingly – and big names such as Ponet Canet for example dropped their prices by 30%, and set the tone for a very successful campaign.

The 2020 Bordeaux En Primeur campaign will be our seventh – and hopefully equally successful as it’s predecessors. For the sixth campaigns undertaken, four of them are performing very favourably, whilst the 2016 and 2017 (arguably the best wines) are slower burners and will no doubt be a longer investment play.

Fingers crossed for sensible release prices from France for the 2020 campaign and we should be on for another productive investment for our various syndicates.