The coronavirus has presented investors with unprecedented uncertainty.
The global financial markets are still reeling from what WHO has called a pandemic, and the White House has declared a national emergency. Last month, the Dow Jones dropped 10 percent in one day, its largest one-day fall since 1987. The Federal Reserve Bank has even stepped in, injecting $1.5 trillion into the economy. In one month alone, the stock market lost well over 20%.
In light of these events, we thought it was interesting to see impact of the coronavirus on the fine wine market with a great deep-dive with our partners Vinovest. With more people looking for alternative investments, especially recession-resistant investments, let's look into this relatively unknown asset.
If you want to skip the details and learn more, check out Vinovest and see how you can invest in fine wine >>
How Does The Coronavirus Affect Fine Wine?
It is natural to wonder how the coronavirus will affect the value of fine wine. After all, equities are cratering under recent financial pressure. With that in mind, it's important to know that fine wine has almost no correlation with the stock market.
Even in the most turbulent economic periods, fine wine manages to march on unscathed. Take the Great Recession in 2008. Stock prices plummeted 52 percent as people created a run on the money market funds. The price of fine wine, though? It had a single digit dip of nine percent.
What Makes Fine Wine A Recession-Resistant Investment?
Fine wine is not susceptible to the same market forces as traditional investments, like stocks, bonds, and mutual funds. While supply and demand impact both assets, the similarities disappear quickly after that. The separate sphere of influence is the key to the recession-resistance.
Factors That Influence The Price Of Wine:
- Annual Harvest Yield
- Consumer Tastes
Factors That Influence The Price Of Equities:
- Company Earnings
- Corporate Management
- Interest Rates
- Political Climate
Barring a cataclysmic natural disaster or shift in consumer tastes, fine wine will remain a reliable investment. Outside factors, like the coronavirus or stock prices, are highly unlikely to influence whether or not someone wants to buy and consume wine. In an interview with Forbes, Silicon Valley Bank Wine Division founder Rob McMillian articulated the sentiment best, saying:
“We have to start the conversation by recognizing that people enjoy wine in good times and stressful times. Wine is not recession-proof, but it is recession-resistant. In the same way, it might not be virus-proof, but it will prove virus-resistant from an economic perspective. There is no chance we will see sweeping abstinence as a consequence of the virus.
Since the Great Recession, there have been several corrections in the stock market, the most recent being the coronavirus. While stock prices fluctuate during these times, the fine wine market tends to stay the same. Fine wine may experience a small decline. That said, there are precedents for price increases.
We understand the coronavirus is creating a lot of concern. The cause for concern shouldn’t extend into investment-grade wine, though. It’s why fine wine is one of the few recession-resistant assets that can safeguard investors from the economic storm.
The Economics Of Fine Wine
Again, fine wine does not play by the same rules as traditional equities. For starters, wine has a fixed supply. Once the harvest is over, that is it. A winery cannot produce more wine for that vintage, even if it's a smashing success.
That supply will only decrease with time because investors will drink the wine. Even if the demand remains constant, the scarcity will drive up the price, barring a significant change in one of the factors mentioned above. The growth is buoyed by increasing interest in fine wine consumption from emerging markets, like India and China.
As Rob McMillian suggested, the coronavirus will not diminish people’s interest in wine. While the outbreak is far from ideal, people should not expect to see a meaningful change in consumption habits. The same cannot be said of the stock market.
The coronavirus has created a domino effect through fear, panic, and uncertainty, all things that investors want to avoid. As a result, many people are selling their stocks to minimize their losses or get their money into "safer" investments. As a result, American investors have lost roughly $3 trillion in wealth.
Fine Wine vs. Gold In Recessions
It's worth taking a moment to talk about gold. The odds are that when investors think of "safer" physical assets, they think of gold. That inclination is not without merit. Gold handily outperformed the S&P 500 from December 2007 to June 2009.
Historically, gold has had an inverse relation with the equity market during times of crisis. That correlation, though, is not stagnant. Gold’s recent performance suggests a positive correlation with the stocks, thus weakening its reputation as a risk-hedging investment.
The coronavirus-induced recession is a perfect example. The United States saw the first COVID-19 death on February 29. In the following days, Florida and California declared states of emergency, public and privates closed, and major corporations-imposed travel restrictions on employees. Gold, which had traded at $1,697 per ounce on March 2, fell 11 percent in a week.
There are other examples of gold’s increasing correlation with the stock market. During the 2018 US-China trade war, gold showed a 0.69 correlation, which means almost 50 percent of the variance between two is correlated. Mathematicians would call this value statistically significant. Fine wine, however, had a negative correlation, coming in at -0.55.
Gold is losing its luster as a portfolio diversifier. Its increasing correlation with the equity market fails to protect investors, despite its “safe haven” reputation. Additionally, the price of gold has more than quadrupled since 2000, far outpacing the reasonable demand for the physical product.
Long-Term Appreciation In The Face Of Panic
It is unclear how long the coronavirus will last. China is returning to its new normal after roughly 50 days. All countries, though, are not as well-equipped or proactive when it comes to treating COVID-19.
While the immediate financial world is in upheaval, fine wine is a long-term investment. It is not something people day trade, like stocks, to make marginal capital gains. Investors do not have the pressure of time when selling wine.
That is, in part, because wine gets better with age. All grapes have a compound called tannins. The organic substance is in the seeds, skin, roots, and leaves of the grape. While the quantity of tannins varies based on the grape varietal, they are present in every wine, to some extent.
Tannins have a bitter and astringent taste. Over time, though, they break down, which makes a wine smoother and more balanced. It is one of the reasons why wine producers put so much emphasis on proper and extended aging. To reap the benefits of aging, investors will likely need enough patience to outlast the 2020 flu season.
Historical Performance Of Fine Wine
Predictions are challenging, and the coronavirus only adds more uncertainty to the equation. The best way to understand what the future holds is to look at the past. From 2008 to 2010, in the throes of the global recession, the Liv-ex 1000, which tracks 1,000 wines from across the world, returned a little less than zero.
The same recession-resistant applied abroad. The March Gestion Vini Catana fund, which started in December 2009, invests in wine production and vineyards. Within a year after opening, it was up nine percent compared to a 3.7 percent decline for the FTSE 100. Meanwhile, the average hedge fund at this time was down 0.2 percent.
The question here is, why? During economic struggles, investor’s preferences do not change in a meaningful way when it comes to fine wine. It is one of the reasons why annual wine consumption has grown for the past 20 years. By the same token, people who purchase investment-grade wine can often afford to hold on to their collections during recessions, mitigating the risk of fire sales.
Wine Business Monthly published a study about which wineries performed the best during the recession in 2008. One of its conclusions was that large wineries had the resources to deal with the downturn. They have well-established consumer bases and can leverage economies of scale.
The second conclusion was that wineries that owned the means of production thrived. Translation: wineries like Château Lafite Rothschild, Screaming Eagle, and many more are in good shape. These estates control their land, grapes, and production, all the way through to distribution. Therefore, they do not have the same concerns as boutique producers that rely on purchasing grapes.
Unsurprisingly, sub-indices, like the Bordeaux 500 and Burgundy 150, performed well during the Great Recession. The former saw a 50 percent increase in value from 2009 to 2011. As for the Burgundy 150, its growth was closer to 60 percent.
The best case for fine wine’s recession-resistant is its history. While it is not impervious, it has stood up against the Great Depression, Dot Com bubble, and more. Researchers found the long-term investment performance of young-maturing wines from high-quality vintages provided the strongest financial return. Not only did it demonstrate remarkable recession-resistance, but it has also outpaced competitors, like fine stamps, arts, and bills, during the same time.
What To Expect From Here
As Managing Director of Cult Wines Ltd. Tom Gearing put it, “fine wine can act as a defensive asset class in times of economic crisis but also benefit from periods of economic growth.” It is why many people use fine wine as a way to round out their long-term investment strategy. The investment reduces overall risk while adding diversification and stability.
While clouds are darkening over Wall St, fine wine is a silver lining. The short-term volatility resistant and long-term appreciation will counteract the chaotic snapshot of the world today.
If you have any additional questions about wine investment, check out Vinovest today.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.