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November 16, 2018

The Possible Impact of Brexit on the UK Fine Wine Market

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On the 23rd June 2016, the UK public made a historic decision and voted to leave the European Union. The referendum had a high turnout of 72.2% of the electorate and returned a 51.9% vote in favour of leaving the European Union. David Cameron stood down and a leadership contest ensued with Theresa May emerging as the new Prime Minister. Under Article 50, the UK’s intent to leave the EU was submitted to the European Council eight months later and set a two-year countdown running to the UK’s scheduled departure on the 29th March 2019. Since the delivery of this letter, both the UK and EU have attempted to negotiate future trade terms and shape the new relationship between the UK and the remaining EU member states.

 

After much speculation, Theresa May has delivered a ‘draft withdrawal agreement’. This is the best indicator we have seen to date on what the relationship between both parties will look like post Brexit. However, when presented to Parliament, the agreement was not well received. A string of resignations followed including the Brexit Secretary, Dominic Raab. The terms laid out in the agreement don’t appear to placate any factions of the house. Conservative or Labour, Leave or Remain, there seems to be real concerns for the future of the United Kingdom. In the wake of the developments seen this week, all options now seem possible; a leadership challenge, a general election or even a second referendum are all still on the table. Furthermore, recent events and the lack of clarity that hangs over the withdrawal all fuel the fire of uncertainty the UK has experienced since the historic vote.

 

Traditionally, uncertainty in politics, translates to turbulence in the economic forum. GBP has seen depreciation and increased volatility with a drop in 11.8% in Euro Terms and a 12.1% loss in USD since the referendum result to the time of writing. Monthly observations of the GBP/EUR and GBP/USD exchange rates can be seen in the indexed performance chart below.

Graph 1

Alongside FX, downturns have been felt throughout different sectors of the economy since the referendum. The FTSE 100 initially took a loss of 3.15% although this has been regained with gains of 10.72% posted to date. Alternative assets with an inverse relationship to traditional markets have posted considerable gains – Investors in fine wine have been handsomely rewarded over this period. Liv-Ex have observed the biggest gains in fine wine since 2011. The ‘Fine Wine 50’ index (LVX50), consisting of the last 10 physical vintages of the five First Growth Bordeaux Estates (namely Haut Brion, Lafite Rothschild, Latour, Margaux and Mouton Rothschild) has seen a 23.03% increase since June 2016. Their broadest index, the Fine Wine 1000 (LVX1000), has also shown a 36.37% increase over the same period. This stellar performance underpins the long thought belief that investment in fine wine is a valuable tool to weather storms felt in the economy and other sectors of asset investment. As with bullion investment, this is demonstrated by the seemingly inverse relationship fine wine has with currency (to read more about this inverse relationship, click here). Historically, a drop in sterling has equated to gains in fine wine. This can be seen in the chart above which visually demonstrates the opposite movements of the LVX50 and indexed plots of GBP in terms of USD and the Euro. The steep decline that can be observed between the first and second periods on the x-axis (EU Referendum date) is contrasted by the sharp uptake in the LVX50.

 

One facet of the dwindling FX rate is an increased interest in the UK fine wine market from overseas investors. There has been a noticeable increase in activity from buyers in the US, Europe and Asia wanting to invest their money in fine wine lying in the UK. This in turn has strengthened the market and substantial gains have been observed. However, with this uptake in demand and outflow of physical stock from the UK, supply of existing physical wine in the UK will eventually dwindle. This will require more stock bought from mainland Europe, possibly at the current, less favourable exchange rate. This will continue to naturally push the UK market price up further. Those with an existing position in physical vintages of fine wine could benefit from this renewed interest by selling portions of their portfolio at the new prices, through overseas channels, to buyers eager to spend in GBP.

 

The draft proposal has given a degree of clarity on what the future relationship with the UK will look like from March 2019 onwards. After the proposed transition period, the UK’s membership of the customs union and single market will cease. Although the exact terms are yet to be defined this is likely to cause disruption in the flow of goods between mainland Europe and the shores of the United Kingdom. The possible ramifications of this on the UK fine wine market are considerable. Delays in transit and elevated red-tape could cause a bottle neck in supply channels and subsequently push domestic prices upwards. This coupled with the less favorable Euro rate UK suppliers are facing when buying European stock, both equates to elevated prices for fine wine once stock already lying in the UK is exhausted. As such, one can confidently posit that taking a position in fine wine of physical vintages, lying in the UK could provide an effective hedge against future volatility or to capitalise on a restricted supply.

 

Another consequence of leaving the single market and customs union is the possible outflow of business and trade from British shores to countries with continued, unrestricted and tariff free access to trade with EU member states. If this is the reality of Brexit then it is likely domestic participation in the UK fine wine market may slow due to a lessening of real income, brought on by higher inflation rates, a sustained downturn and possible recession in the UK economy.

Graph 2

From six months prior to the referendum to date, both the LVX50 and the LVX1000 have consistently matched or outperformed the FTSE100. Figure 2 shows rebased plots of these indices over this period, from January 2016 to November 2018. Month on month, the Liv-Ex 50 has outperformed the FTSE100 at 68% of observations. Up until the fifth plot, a similar trend can be observed between the LVX50 and FTSE100. However, the sixth plot (EU Referendum date) marks the point there the indices begin to deviate. The LVX50 goes on a distinct upward trajectory when compared with the FTSE100. The reason for this separation is twofold. Firstly, after the Brexit vote was announced, the inflow of capital to the UK began to waver. This was due to the high levels of uncertainty surrounding the UK’s future, the tumbling currency and the speculation on what role the UK would now play on the world stage. Secondly, the fine wine market entered a period of aggressive growth, primarily due to the aforementioned reasons.

Despite the draft agreement being delivered, a lot remains to be decided. Even if the final agreement successfully passes through both houses, the future trading relationship with the UK and the European Union is still unclear. The Brexit process has presented a double-edged sword for the UK fine wine market with both positive and negative aspects. Since the referendum, the UK market has experienced a period of growth, this is documented by the aggressive surge observed in the Liv-Ex indices over this period. At this moment, it is unclear what the UK’s Brexit will look like, and what impact it will have on the UK people. However, what is clear is that fine wine has again proven itself as not only a prosperous asset class, showing above average returns, but as a valuable tool to safeguard your funds against fluctuations in currency and downturns in mainstream investment vehicles.

 

Daniel Good