As a tangible, alternative investment how do we expect fine wine to respond to inflation movements and forecast interest rate cuts in H2 2024?
The 0.2% annual rise in UK inflation in July was the first increase in 2024 was a better move than predicted and generally well-received by financial market commentators.
Linked to domestic energy costs falling less last month than they did in July 2023, inflation movement is still down in key sectors. Services inflation is down from 5.7% in June to 5.2% in July 2024 and food prices remained stable at 1.5% month-on-month according to the Office for National Statistics.
How does fine wine prices respond to rising inflation
Fine wine has a proven record of being a valuable hedge against rising inflation. As we witnessed during the period of Covid-induced soaring inflation in 2021 to October 2022, when the UK level reached 11.1%, fine wine prices rose. The very significant cash erosion by rising inflation caused a surge in demand and corresponding price growth as investors sought alternative assets providing a safe haven.
In fact, this stimulated the bull run in fine wine which saw average price growth of investment wines exceed 20% in the period to the market peak in October 2022. As inflation has fallen since then the fine wine market has also undergone a correction to address the very significant price growth that took place, particularly in Burgundy and Champagne which saw the highest levels of uplift.
Values for key investment wines in July 2024 are still higher than pre-pandemic levels despite the 19-month adjustment that has followed. For example, Louis Roederer Cristal 2008 has grown 75.3% in the three years to 31st July 2024 with a 9.1% price rise in that month despite the market correction. (Source: Liv-ex Market Report August 2024).
What do interest rate changes mean for wine investors?
Inflation is a key factor for interest rate changes. The Bank of England’s programme of rate rises across 2023 to tackle record-breaking inflation growth, took the interest rate level to 5.25%, the highest in decades. This successfully brought inflation back to target levels around 2% in summer 2024. The Bank of England is now expected to make two further rate cuts this year following the 0.25% reduction in early August. So, what can wine investors expect?
Analysis by Liv-ex published in late July 2024 looked at the impact of earlier periods of interest rate cuts on fine wine prices. The data revealed that a period of decreasing interest rates is directly correlated to an upward movement in the value of investment wines.
Interest rate cuts in 2009, following the 2008 financial crisis, mid 2016 (Brexit volatility) and early 2020 (Covid), were all followed by rising demand for fine wine which boosted significant price growth.
There is also a currency angle for overseas buyers. As rates are cut in the UK the exchange rate may also favour US dollar, Euro and other denomination buyers and boost demand from these market sectors. We have witnessed this in the past.
A primary motivation for the Bank of England to cut rates is economic growth and this is very clearly a target for the new Labour Government in the UK. The next rate setting meeting is due to be held in September when the MPC will be armed with the August inflation, wages, and employment data.
In this context, the fine wine market is potentially primed for a return to growth:
- Liv-ex regional market indices suggest fine wine prices are approaching or at their lowest market point in the cycle.
- Investment wines are available at average discounts of -12% in the year to 31st July 2024 (Liv-ex 1000 at 31.07.24).
- Some individual investment wines are delivering notable price growth now.
- Liv-ex Champagne 50 index recorded 0.9% growth in July 2024.
- Top performing investment Champagnes rose nearly 10% in July 2024.
- Potential future changes to Capital Gains Tax.
Tax and fine wine assets
One of the key factors for growth in the remainder of the current financial year 2024 / 25 is the potential for the Treasury to make changes to Capital Gains Tax (CGT) in the Autumn Budget. There has been much speculation about this tax being a potential tool for the new Chancellor to add much needed revenue to the Treasury coffers.
Fine wine is classified as a Wasting Asset and as such investment gains are generally treated as exempt when considered for CGT.
Our special Report on Tax and Fine Wine in 2024 / 25 provides further insight. We also recommend that all wine investors seek specialist tax advice in regard to their personal circumstances.
Our view on interest rate cuts and fine wine in H2 2024
Evidently there is a strong argument to see further rate cuts this Autumn with growth a priority for Sir Keir’s Government. Consumers and investors are spending carefully and forensically looking for value in both everyday goods and their investments.
Wine investors understand that fine wine assets should be held for the long term to enjoy the best returns and that there are cycles in every market. We expect the slowdown in the price adjustment in 2024 so far, to level off and see the final months of the year as a genuine opportunity for investors to buy at the market low. Investors can be strongly positioned for future growth which may well be aligned with a period of rate cuts in the UK.
For more information on the current market trends see our latest Market Report and speak to a member of our expert team on 0203 384 2262.