Fine Wine offers good news for investors amid turbulent scenes on the global markets
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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.
Boris Johnson: “you must stay at home”
Boris Johnson addressed the nation on Monday evening to outline new rules people must follow in order to help contain the spread of COVID-19.
“All over the world we are seeing the devastating impact of this invisible killer,” the Prime Minister said. “And so tonight I want to update you on the latest steps we are taking to fight the disease and what you can do to help.” Boris Johnson continued: “To put it simply, if too many people become seriously unwell at one time, the NHS will be unable to handle it – meaning more people are likely to die, not just from coronavirus, but from other illnesses as well.” The Prime Minister explained that it is crucial we slow down the spread of the illness, as it is the only way the number of people needing hospital treatment at any one time can be reduced. The government had previously recommended people stay at home and practice social distancing, but it became clear that many were not following these instructions. “And though huge numbers are complying – and I thank you all – the time has now come for us all to do more.” “From this evening I must give the British people a very simple instruction – you must stay at home.” Boris Johnson said that it is “critical” we stop the disease from spreading between households. New guidelines have been announced revealing the limited reasons why people are now allowed to leave their homes:- Shopping for basic necessities (though this must be done as infrequently as possible)
- One form of exercise a day alone or with members of your household (running, walking, cycling)
- Any medical need, to provide care or to help a vulnerable person
- Travelling to and from work when it is absolutely necessary and cannot be done from home
FTSE 100 rallies following Federal Reserve stimulus and Italian coronavirus positivity
The FTSE 100 rallied in early trade on Tuesday after the Federal Reserve unleashed a new wave of stimulus and reports of coronavirus cases in Italy showed some signs of improvement.
On Monday, the Federal Reserve announced a huge stimulus package. In a time of unprecedented measures by central banks around the world, the most recent Federal Reserve package stands out due to the sheer size and scope of the measures.
The Fed said they would purchase and unlimited amount of assets and securities to help avoid a credit crunch. While the measures are designed to help the wider population, the initial impact was enjoyed by markets who cheered the additional liquidity.
Whilst the Federal Reserve moved to support markets and the economy, the US Senate again failed to agree a deal to provide fiscal stimulus to the US economy.
Adding to the positive mood on Tuesday and helping risk-on optimism was news from Italy that the number of news cases of coronavirus was falling in regions most heavily hit.The Federal Reserve is now the chief financial policymaker in the United States. That’s because our political branches are apparently utterly incapable of shoring up markets without also attempting to take over businesses.
— Ben Shapiro (@benshapiro) March 23, 2020
FTSE 100 rally
The injection of optimism in the market saw the FTSE 100 rise as high as 5,282, up over 5.5% on the day, before drifting back. Oil prices also rose, providing further support for oil companies that were among the top riser on Tuesday. FTSE 100 oil heavyweights BP and Shell were both up over 10% within the first hour of trading adding a significant number of points to the FTSE 100. Not every stock joined the rally, however, as ITV remained in the red a day after cutting their dividend and DIY outlet Kingfisher gave investors a cause for concern.Economic Data
There was raft of economic data from Europe on Tuesday morning that highlighted the impact of coronavirus on European economies. Market Eurozone PMI Services plummeted to 28.4, missing estimates of 39. A reading below 50 represents a contraction. The prior reading was 52.6. UK Services PMI fell to 35.7, representing a huge decline in the services sector before the UK lockdown was brought into effect.The poor data hardly impacted markets, suggesting a large degree of the negative economic data was already priced into markets.Blimey. Britain’s services sector, the engine of the UK economy, contracted more than ever in March. Purchasing Manager’s Index down from 53.2 points to 35.7. Anything below 50 points is a contraction. Worst since the data series began in 1998 pic.twitter.com/tRcuTcOALm
— Ed Conway (@EdConwaySky) March 24, 2020
Novacyt shares jump 45% following FDA approval for COVID-19 tests
Novacyt shares (LON:NCYT) have jumped more than 45% after it received approval from the U.S. Food & Drug Administration (FDA) for it’s COVID-19 testing kits.
The Novacyt share price rose as much as 48% to 185p by mid day trading in London.
Last week, the UK Investor Magazine highlighted Novacyt as one of the few companies providing investors with any positivity during the coronavirus crisis and today’s announcement is a significant milestone for the company.
The FDA approval means Novacyt kits are now allowed to be used in US hospitals and laboratories to test for COVID-19.
Graham Mullis, Chief Executive Officer of Novacyt, commented:
“The US FDA EUA authorization is another important endorsement of the performance and quality of our COVID-19 test and demonstrates once again Novacyt’s growing role in tackling this pandemic.”
“We are committed to providing clinicians around the world with our COVID-19 test and delighted we can now support the US market.”
Novacyt has also recently received orders from Public Health England to the tune of £1 million and said last week total orders for COVID-19 had surpassed £8 million.
The company gave no indication on potential size of orders from the US but said kits were available for immediate distribution.
To deal with any surge in orders, Novacyt announced its was investing in additional capacity to deal with a predicted demand of 2 million COVID-19 testing kits.
Atlantic Capital Markets: Royal Dutch Shell “still fundamentally sound”
Royal Dutch Shell (LON:RDSB) have announced a cost-cutting program in reaction to the oil price collapse and ongoing uncertainty around coronavirus.
The Shell share price has declined more than 66% from the 2018 highs to recent intraday lows of 890p.
Today’s measures are aimed at improving Shell’s financial situation and includes $3-4 billion of cuts to operating costs.
The oil giant also said it would be ceasing its share buyback programme, but made no mention of changing their dividend.
Ben van Beurden, Chief Executive Officer of Royal Dutch Shell, commented:
“As well as protecting our staff and customers in this difficult time, we are also taking immediate steps to ensure the financial strength and resilience of our business.”
“The combination of steeply falling oil demand and rapidly increasing supply may be unique, but Shell has weathered market volatility many times in the past.”
“In these very tough conditions, I am very proud of our staff and contractors across the world for maintaining their focus on safe and reliable operations while also ensuring their own health and welfare and that of their families, communities and our customers.”
Despite today’s announcement raising questions about Shell’s short term profitability, equity analysts are still confident about the long term prospects of Royal Dutch Shell.
John Woolfitt, Director of Trading at Atlantic Capital Markets said “clearly since we first highlighted it as a tip of the year the global backdrop has considerably changed, Oil prises collapsing and Cornavirus. Todays announcement has also highlighted the steps they are making in the current environment.”
“Nobody could possibly have seen this coming at the start of the year but lets not get caught up in the near term moves. They are still fundamentally sound and still offer investors an opportunity to pick them up at considerably lower levels.”
“Sharebuy backs have been reduced for the time being but no mention of a dividend cut.”
Associated British Foods closes all Primark stores
Associated British Foods plc (LON:ABF) shares fell on Monday after it announced that all Primark stores will shut amid the evolving COVID-19 outbreak.
Shares in the company were down by almost 8% during trading on Monday.
Associated British Foods said that all 376 Primark stores in 12 countries are now “closed until further notice”.
It continued to warn that this represents a loss of roughly £650 million of net sales each month.
The British government has recently accelerated measures to contain the spread of the illness.
People are being encouraged to stay indoors and practice social distancing.
Elsewhere on the high street, Laura Ashley (LON:ALY) recently collapsed after the COVID-19 outbreak had an “immediate and significant impact” on trading.
Meanwhile, Boris Johnson told cafes, pubs, bars and restaurants that they must close their doors.
Associated British Foods said on Monday: “A variety of work streams have been established to mitigate the effect of the contribution lost from these sales and all expenditure is being reviewed. In the first instance we have implemented a significant reduction in discretionary spend. We are making good progress in also reducing fixed costs following discussions with counterparties, in particular landlords, and welcome the recently announced government support in the countries in which our stores operate. ”
“As a result, we currently estimate being able to recover some 50 percent of total operating costs,” the company continued.
In order to manage Primark stock, Associated British Foods has informed suppliers that it will stop placing new orders.
https://platform.twitter.com/widgets.js Shares in Associated British Foods plc (LON:ABF) were down on Monday, trading at -7.96% as of 12:03 GMT.With the health and welfare of our employees and customers at the front of our minds we have made the decision to close our stores in the UK, until further notice. A huge thanks to all our employees, customers, suppliers and partners for their continued support 💙 pic.twitter.com/AynpV8KiQi
— Primark (@Primark) March 22, 2020
McDonald’s to close all restaurants in UK and Ireland
McDonald’s (NYSE:MCD) will close all restaurants in the UK and Ireland by 7pm this evening, the fast food company announced in a statement on Twitter.
As the COVID-19 outbreak continues to evolve, the British government has been accelerating measures to contain the spread of the illness.
On Friday Boris Johnson told cafes, pubs, bars and restaurants that they must close their doors.
The hospitality sector is one of the latest to feel the strain of the outbreak as the situation continues to develop.
“We have taken the difficult decision to close all McDonald’s restaurants in the UK and Ireland by 7pm on Monday 23rd March at the latest,” a statement on Twitter announced.
“This is not a decision we are taking lightly, but one made with the well-being and safety of our employees in mind as well as in the best interests of our customers,” the statement continued.
“We will work with local community groups to responsibly distribute food and drink from our restaurants in the coming days.”
“Thank you to our brilliant employees for their hard work during this incredibly challenging time.”
“We look forward to seeing you all again as soon as it is safe for us to reopen.”
https://platform.twitter.com/widgets.js Likewise, Nando’s has also closed its doors to help contain the spread of the virus. “We have decided that the best course of action right now is to temporarily close our restaurants until further notice,” the restaurant chain also said in a Twitter statement.An update from McDonald’s UK and Ireland — See you soon pic.twitter.com/43moFRrWRR
— McDonald’s UK (@McDonaldsUK) March 22, 2020
https://platform.twitter.com/widgets.js The Prime Minister also said last week that all schools in the UK are to close, but they are to make provisions for the children of key workers to support them whilst they help keep the country running.Lots of love, Nando’s ❤ pic.twitter.com/OxIGVeU4S5
— Nando’s (@NandosUK) March 22, 2020
World Health Organisation: China provides “hope for rest of world”
The leader of the World Health Organisation has said China provides “hope for rest of world” following the resumption of normal everyday activities in some province across the world’s second largest economy.
The spread of Coronavirus started in Wuhan in late 2019 and has officially recorded 81,000 cases and 3,270 deaths.
Despite scepticism around the validity of the official Chinese figures, the measures taken by China have certainly slowed the spread of Coronavirus to the extent people can now leave their houses and President Xi recently felt confident enough to visit the epicentre of the outbreak.
There have also been reports of traffic jams building up in Beijing once more.
However, whilst China has passed the worse of their initial COVID-19 outbreak, many western countries are still moving towards the peak.
Italy has now sadly recorded 5,476 deaths while the UK and Germany have recorded 281 and 84 respectively.
There is however a big variation in the death rate of those tested positive for COVID-19 between different countries.
This is starkly highlighted by the difference between Italy’s death rate of 9.2% where there have been 59,000 cases of Coronavirus, and Germany, where the death rate is just 0.33% from 25,000 cases.
The large discrepancy has been attributed to a number of factors including the higher levels of testing in Germany and the fact they had more time to prepare for an outbreak, having witnessed the devastating spread throughout Italy.
Although this hasn’t been confirmed officially, it has also been suggested Germany are only reporting Coronavirus deaths where there were no underlying health issues. A statistically interesting point is an Italian study found that 48.5% of people who died following testing positive for Coronavirus had three underlying illnesses.
Spain has also been heavily hit with 1,700 deaths in people testing positive for COVID-19.
“Hope for rest of world”
Despite the recent increases in the number of cases in Europe and the US, some experts are predicting Italy could peak 23rd March – 25th March. This wouldn’t mark and end to coronavirus but will provide respite for intensive care units and if China’s model is a benchmark, the start of a normalisation, in Italy at least. With the UK roughly two weeks behind Italy in terms of cases, the UK could expect a peak in the second week of April. However, the UK does have the advantage of being able learn from Italy, China and Iran and may be able to bring the spread under control sooner.BP share price: will they cut their dividend?
The BP share price (LON:BP) has crashed over 50% from the recent highs and the BP dividend now provides one the highest yields the oil giant has ever recorded.
With a BP share price of 237p, the oil & gas company is yielding a bumper 14.7%.
This yield is of course based on last year’s dividend and isn’t necessarily the yield investors will get going forward, if BP decide to amend their payouts.
The sell off in oil prices induced by coronavirus and a production war between Saudi Arabia and Russia now brings the BP dividend into question. In particular, whether BP will have to cut their dividend.
The increase in the quarterly dividend in Q4 from 10.25 cents to 10.5 cents means BP paid out $8.3 billion in dividends in 2019, up from $8.1 billion in 2018.
The affordability of this payout will dictate whether the BP has to cut the dividend in 2020. Key to the affordability of the dividend is BP’s profit in 2020 and BP’s cash reserves.
