Sponsored by OenoFuture

OenoFuture’s Chief Wine Analyst and Master of Wine Justin Knock explains how fine wine offers good news for investors amid turbulent scenes on the global markets.

I’m thinking a lot at the moment about Clint Eastwood, his Oscar-winning film Unforgiven, and his grizzled character William Munny. Munny is the ageing hard man of the West who has seen it all, a survivor of every gun fight in his long life including the last one in the movie. He survives not because he’s the best but because he never panics. Looking at market movements over the past two weeks we could all use a bit of William Munny’s self-control right now.

The picture looks bleak across the board. Oil is heading to record lows in the face of a burgeoning supply glut. Stocks are cratering everywhere, bonds snapping to record low yields, central banks slashing rates and pumping cash into the system, and governments are promising extraordinary fiscal stimuli. As if that wasn’t enough, perhaps the most worrying of all is the lack of clarity on forward earnings potential for almost every industry sector. So, how do we respond? Or rather, how would Clint Eastwood’s Munny assess and then act in the current market situation?

Have we hit rock bottom for stocks or is this just the beginning? US Treasuries have hit records, but where can valuations go in the face of massive stimulus from the government and QE from the Fed? Should you be buying or selling gold? They’re all great questions which no one can currently answer.

Cash is clearly king today. We’ve all seen major moves in stocks, bonds, commodities and other liquid assets over the past two weeks in efforts to raise cash. Gold is actually performing its purpose, acting as a store of value in times of duress, which explains its current liquidation and falling price. Concerns are driven around asset valuations and a potential deflationary environment leading to recession and perhaps worse. Placing cash into any of these assets right now seems frankly illogical.

Taking a wider view, it’s hard to look around the financial landscape and feel positive at the moment. But we have been through this and worse before, and a calm head can prosper. Winning this year is not necessarily about making huge returns. It’s about preserving your capital so you can stay in the game and win over the longer term.

Wine is a proven winner in difficult times. Why? Fine wine enjoys remarkably low volatility – it’s not as liquid as the assets listed above and it operates in a much smaller market overall, a sheltered cove away from the raging oceans of bonds and stocks. Not only is volatility lower, but fine wine also generates steady returns over the medium to long term. In the current environment where deflation is a legitimate concern this has real value to the wise investor.

What about consumption? On one hand, COVID-19 is currently devastating the hospitality industry globally, and we are in the middle of the largest crisis in the restaurant industry anyone has experienced. It’s a traumatic time with wine sales in both the on-trade and in tourism nose-diving across the globe.

Fortunately, that’s only half the consumption equation. In the last recession sales and consumption of fine wine rose steadily; unable to dine out people choose to eat in at home. And they could afford to eat and drink much better quality. A wine on a restaurant list at £150/bt is only around £40/bt to take home. Those with extensive wine cellars dug into their hollow logs – the preceding years of fine wine acquisition meant mature wines, ready to drink and already paid for (except for duty & VAT).

We now find ourselves at the start of the largest single home confinement period in history. Hundreds of millions of people are on or close to lockdown at home. We will all be eating and drinking at home every night for the foreseeable future. This is the moment for fine wine to come to the fore, especially given the relentless cycle of grim news encouraging us all to enjoy a glass or two of something great.

During the last recession stocks of mature fine wine were depleted, especially so-called ‘off vintages’ or ‘drinking vintages’, such as 2001 in Bordeaux, 2000 in Burgundy, 1998 in Champagne and so forth. In the years following the end of the recession these wines have excelled in the market because there is so little stock available. 2001s in Bordeaux were once 30-50% of the cost of the famous 2000s, but now trade at 60-70% of their value.

Fine wine can also offer a hedge against inflation. The past couple of weeks have been extraordinary; the Fed has slashed rates by 1% (the largest cut in their history), made $1.5 trillion available to the repo market, and announced $700bn to buy treasuries and mortgage-backed securities. These are unprecedented actions which have only furthered panic instead of reassuring investors. In the past two days we have seen enormous fiscal policy weapons unveiled – €500bn in emergency business loans from Germany, €300bn from France, €100bn from Spain and a total of €1tn from European institutions. The US government also announced a $1.2tn fiscal stimulus package. These numbers are truly mind-blowing. When we get through the current panic there will be enormous sums washing through the system, looking for a home and creating potentially massive inflationary pressure. If the US bond market begins to crack then all inflationary bets are off. Cash will be a poor place to be under this scenario.

Fine wine priced in sterling is currently trading at an 8-10% discount from last month against the USD and the EUR thanks to depreciation of GBP, yet prices have hardly moved. This is good news for investors since there is still time to acquire great wine at solid prices. In the current maelstrom of panic it’s hard to think of a safe place to invest, but if we cast our minds back to Munny I can see him sitting in the corner, on a case of the finest wine, taking steady aim at his next assault. And he’ll definitely be walking home after all the dust has settled to enjoy a well-earned drink.