The Bank Rate has hit 5% today, what does this mean for wine investments?
- How are investments affected by interest rate hikes?
- The wine investment cycle currently
- Investor sentiment for fine wine
- Inflation and wine
UK inflation stubbornly stalled at 8.7% in May, matching April 2023, unmoved by last month’s 0.25% rate hike. The hoped for month on month decline in the CPI did not occur and, consequently, the Bank of England Monetary Policy Committee has acted robustly. The forecast 0.25% rate hike was doubled to 0.5% taking the UK Bank Rate to 5% for the first time since pre-the 2008 financial crisis.
No doubt, if the BoE is going to hit its target of returning inflation to 2% there needed to be a bold move. Concerns over the implications for mortgage holders, and particularly those needing to get a new mortgage in the next six months at least, are very real. Those not on fixed rate mortgages or have renewed recently are already paying the price, adding further to the current miserable cost of living in the UK.
Commentators are asking should the Government step in, given Liz Truss and her Chancellor’s calamitous interventions have been a major influencing factor on the situation. Those of us that can remember the penal interest rate environment of the late 1980s / early ‘90s struggled through that era and know the reality of living under those pressures. But help from the Treasury is unlikely.
Savers are not yet seeing any real commensurate change in rates and inflation at 8.7% is still munching away at cash value.
How are wine investments affected by the rate increases?
The fine wine market is currently seeing some price correction. At the end of May 2023, the very short-term trend for wine investment is an average decline of -3.3% in prices year-to-date as recorded by the Liv-ex 100.
However, as we consistently point out; fine wine should be considered as a medium to long term investment. This is illustrated by data over the last five years where the constituent wines of the Liv-ex 100 have seen average growth of 29.6%, compared to the FTSE 100’s extremely modest 0.8%.
Apply the same principle to Champagne, in May the Liv-ex Champagne 50 slipped -2.1%, following a -1.4% fall in April. Over the last five years the region’s wines have delivered an average growth of 76.8% exceeding the S&P500’s 53.4% and gold’s 52.1%.
The business cycle in fine wine investment
Current price correction following the two-year bull run between 2020 and 2022 is exposing opportunities to acquire investment wines at a discount. This is an important time to consider averaging down the cost of your wine portfolio, whilst also diversifying with some excellent wines at prices not seen for months.
We can see this is happening in the market. Some top investment Champagnes saw a price fall of more than 5% in May and at the same time were some of the most traded by volume and value on Liv-ex.
Investor sentiment and wine investment
Sentiment and the emotional cycle are more centred on the health of the economy. In periods of economic stress and recession, investor fear can become a driver for trading activity on financial markets. At the same time fine wine has seen values grow as tangible assets are proven to protect capital.
In addition, fine wine offers tax benefits with a general exemption from CGT on any gains. The Covid pandemic and most intense period of the Ukraine crisis demonstrated this perfectly. From May 2020 to summer 2022, fine wine was consistently delivering stronger growth than key financial markets and gold.
Inflation and wine investment
We are currently in a corrective stage in the cycle and living with a complex economic environment influenced by Brexit and public sector strike action in the UK. We are yet to feel the full weight of the consecutive interest rate rises to date in the economy. With a tight labour market still driving wage growth there are real concerns about the short to medium term state of the UK economy and the potential for recession.
The property market in the UK, a source of key investor confidence, saw annual growth turn negative for the first time since 2012 in May 2023.
Fine wine generally remains relatively detached to conditions in financial markets and holds its value when inflation is rising. Investors could capitalise on the current correction in the wine market to shelter capital from the still stubbornly high levels of inflation and benefit from future tax-efficient gains. See our specialist Tax Report for more information.
Our view on the current market conditions
Despite the current trend of price correction, individual wines are still delivering growth. The top performer in May 2023 on Liv-ex was Burgundy icon, Domaine de la Romanée Conti La Tâche 2018, which saw its price rise by more than 10% in the month. In the longer-term individual wines are still providing outstanding returns with Burgundy averaging 75.7% over the last five years.
History shows us post the 2008 financial crisis, the 2016 Brexit vote, Burgundy’s overheated bull run in 2018, the Covid pandemic and war challenges of recent years, cycles come and they go. Prices rise, fall and rise again. The old adage “Buy low to sell high’ is a basic investment principle and the current contraction in fine wine prices could be a golden opportunity.
For more information, see our June Market Update Report and speak to a member of our expert team on 0203 384 2262.
Data source: Liv-ex at 31.05.2023