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October 15, 2018

Fine Wine’s Correlation to Conventional Markets

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Global stock markets have suffered a turbulent period over the last two days with £36bn wiped off the FTSE100 on Thursday alone. The downturn started in the US by frenzied selling before spreading to other markets across the globe. The tumbling US markets were only exacerbated by scathing comments from President Trump regarding the numerous rate rises from the Federal Reserve. It is times like this when investors turn greater attention to alternative assets, those with weak correlation to traditional markets to weather economic turbulence. Gold has shown on numerous occasions to move inversely to changes in FX, other commodities and stock markets: the UK gold price increased 2.82% in the last 24 hours, peak to trough.

Since it’s rise in popularity as an alternative investment class, fine wine has also shown to be an effective vehicle to protect investors’ funds whilst generating capital growth. This is due to the inverse relationship observed between fine wine and traditional markets. Fine Wine has not only demonstrated some of the best returns among asset classes over the last 20 years, it has consistently shown positive returns at times where other sectors of investment have experienced downturns. Over the past 16 years, the Liv-Ex 100 and Liv-Ex 1000 have returned 227.38% and 205.08% respectively. These returns dwarf the capital appreciation recorded in the FTSE100 (40.02%), Dow Jones Industrial Average (142.97%) and Nikkei 225 (120.73%). Returns found in Brent Crude Oil (238.72%) are comparable and gold has outperformed, however, the lower volatility seen with the Liv-Ex 100 (9.14%) and Liv-Ex 1000 (5.09%) compared to these commodities,  29.52% and 14.07% respectively, adds to Fine Wines allure.

Within fine wine, several regions are considered investable. This is reflected among the numerous indices Liv-Ex provide. The lowest volatility can be found in the Champagne 50 and Rhone 100, both registering 5.2% although the average across the indices is only 6.1%. When comparing realised returns with volatility, the Champagne 50 gives the second highest historical returns of 250.99% over a 14-year term (only the Burgundy 150 records higher with 261.94%), with the lowest volatility.

It is yet to be seen whether the losses felt over the last two days will be quickly regained, if the markets will bounce back or if the new period of economic uncertainty and regularly raised interest rates will cause further losses to be posted. This period highlights a shortcoming of investing in markets highly susceptible to macro-economic influencers. Fine wine has shown to give a good balance between expected returns and volatility. When included in an investment portfolio, these types of commodity can give diversification and mitigate risk from other higher risk investments. It is for this reason coupled with the inverse relationship to traditional markets that fine wine is becoming ever more recognised as not only a safe haven investment for periods of market contraction, but a valuable addition to investment portfolios.

Daniel Good