Could the US Government wallet be empty and how does this affect wine investors?
It’s not just the world’s richest nation’s finances at the mercy of a knife-edge vote in the US Congress tomorrow, it’s all of us! Could the unthinkable happen and the US Government literally run out of money?
Global markets have become increasingly jittery over recent weeks as the deadline X-date of the 5th June 2023 has loomed ever closer with no certainty of a deal to address the necessary extension of the US Debt Ceiling currently standing at US$31.4trn (£25.2trn).
Finally, a draft deal was set out which doesn’t actually raise the limit but suspends it until 2025. The rationale being the political ‘elephant in the room’ of the US Presidential election in 2024 doesn’t influence, or be influenced by, this key decision now.
The details, which have required necessary cuts to welfare, Medicaid and largely freezes all non-defence budgets, are now with Congress which is expected to vote tomorrow (31st May 2023). There is concern that neither Republicans nor Democrats are satisfied with the plan. That said can either party stomach the political and economic consequences of a US default on its debt?
Analysts predict that a ‘non-deal’ or intentional default, would create a seismic shock which would impact globally. There would be a ‘direct hit’ on the US economy that would domino out to all markets.
US Government debt is considered the bed-rock of the global financial system and the ‘safest asset in the world’. It is, therefore, the benchmark point for valuing all financial assets and dollar-based commodities. If there was a default on US debt, it would appear to be ‘less safe’ and borrowing would become more expensive, potentially for all of us. Uncertainty abounds!
With core inflation still sticky and at uncomfortably high levels, interest rates are likely to continue to rise. But savings are still at the mercy of inflation.
How is fine wine affected by US Debt uncertainty?
Currently, fine wine is holding a relatively steady line as equities are responding to the current uncertainty with predictable volatility. There are opportunities in the market now to buy Champagne and Burgundy at lower prices due to the correction from the 'bull market' in 2021 and 2022. The Bordeaux 2022 En Primeurs are starting to be released and this is raising the focus on the region. Older vintages are also offering value to investors.
Tangible assets like fine wine tend to remain less influenced by events in financial markets and can offer sanctuary during periods of economic stress.
How has fine wine responded to past economic uncertainty?
As global markets struggled with the 2008 crisis, fine wine values saw a sustained period of growth, which was led by the Bordeaux First Growths, from October of that year through to June 2011. The First Growths then suffered a lull in price performance as the market focus broadened into other wines of the region along with top Burgundy, Italy and Champagne as investors sought value.
Uncertainty in financial marktets stimulated by the UK Brexit vote in 2016 saw another spike in demand and prices of investment wines. Investors sought tangible assets able to withstand volatility in global markets. This period of growth was led by Burgundy in particular in 2018. Record sales saw individual bottles of Domaine de la Romanee Conti 1945 sell at auction for around US$500,000.
A period of drift for Burgundy didn’t slow the overall growth in the secondary market in fine wine as Trump introduced higher levies on imported European wine (excluding sparkling) in 2019. The market became increasingly diversified and more accessible to investors.
And then Covid hit and the values were again boosted, followed by the Ukraine War. Prices and trading levels continued to rise month on consecutive month from May 2020 to summer 2022. Burgundy and Champagne led the drive in demand and enjoyed an energetic bull run across the period.
Our view on the US Debt Ceiling and wine investment.
We are now witnessing a correction in some fine wine prices and buyers have the opportunity to enter the market and add to their portfolios at a discount compared to 2022.
The US debt is rising, it certainly isn’t going away, assuming the deal is agreed tomorrow. And it is most likely it will be. Uncertainty is here to stay. Interest rates are expected to remain high for the foreseeable and recession could add to the mix. For some this may be the necessary solution to bringing inflation down, but where does that leave equity investors? Looking for stability again. Fine wine continues to be an important means of diversifying a portfolio in the current environment.
For more information on current trends see our latest Market Report and speak to a member of our expert team on 0203 384 2262.