3rd September, 2019 by Philip Staveley
A picture paints a thousand words, so let’s have a go at interpreting a few to see where it leads. We suspect that one answer might recall that old joke about if that’s where you want to go to I wouldn’t start from here, because in the world of investment the best rewards often seem to depend on where you begin.
In each case below the colour references are the same, the less obvious being blue for the S&P and green for oil.
Here we have the relative performance over six months, a short term time frame by any other than a day-trader yardstick. Hands up all those who foresaw an escalation in trade war tensions three months ago, and did something about it, i.e. buy gold. Of course a magician would have bought oil in March and switched into gold in June, but that’s not the way life is.
By the way we referred in a note in June to the likelihood of gold breaking out through the US$1,350 level, so we haven’t been blind-sided by this to any degree, indeed nor do we think anyone else should have been. It is now US$1,545 although you can’t tell that from this relative view (above). Incidentally you will see that the red line representing the Liv-ex 1000 (the broadest fine wine index) ends abruptly a month ago, and the reason is simpy that it is updated on a monthly basis.
What is interesting is that this heightened uncertainty hasn’t negatively affected the US equity market to any great extent, so we suggest that it is by no means a gimme that the world is going down the tubes. Commentators bang on about the likelihood of the US entering recession before too much longer but that isn’t exactly obvous from the S&P either.
What is clear is that fine wine prices have struggled to make headway in this phase, and we must pause to speculate why one physical asset (gold) should outperform while another (fine wine) should not.
We believe there is one very good reason for this: the scale of the uncertainty. To our way of thinking even allowing for Donald Trump’s predilection for doing the unexpected, the markets have been surprised by his statements. From a consensus view that the US and China would pull back from the brink, there is now a belief that it may be too late to avoid something materially destabilising, and this has resulted in a significant switch into the archetypal safe haven.
Simply put, you can’t switch significant sums into fine wine. That market has many attractions but abundant liquidity is not one of them. It has been left behind because investors and high net worth individuals have had bigger fish to fry. Gold has been their best possible hiding place.
Moving out to a 12 month view two things are striking:
Firstly, the oil price outperformance in H1 2019 was consequent to a large decline in the prior three months, and will have been partly attributable to that; secondly, investors have actually been nervous enough for gold to have outperformed for longer than had earlier seemed apparent.
Column inch constraints prevent a thorough examination of each ‘picture’ so we move on to:
The two year view.
The most arresting line is oil, and if we may we will leave it for now and come back to it later.
So, gold is up 25% over one year and the S&P is down 1%, but if you’d put your money down in equal measure two years ago they are almost identical. (As is oil actually, despite its mid-term gyrations.)
Fine wine, meanwhile, is beholden to Burgundy for its performance, to the following extent:
Now, whether you were lucky enough to participate in the Burgundy wave or not, it is pretty clear where most of the attention within the market was for those 24 months. We must also note that since Burgundy did so well, (+42%), if the Liv-ex 1000 only rose 13% over that time frame it doesn’t say much for performance elsewhere in the fine wine world. That should give some clues as to where outperformance hereafter might come from.
Over five years, which we believe to be a reasonable time frame over which to consider investing in fine wine, the 1000 index is pretty much neck and neck with the S&P. The 100 index is up 33% as might be intimated by the extravagant rise in Burgundy prices.
A quick word on oil since we have included it. Oil is a great example of a short term investment, the very antithesis of fine wine. To our way of thinking this is because you need to be able to second guess the Saudis and OPEC, among other things. Regrettably it is not just a play on the growth of emerging market economies, but as you can see you can make (and lose!) a lot in no time at all.
For the much longer time frame we have reverted to the Liv-ex 50 index, not because the results are better, but because prior to 2011 these were generaly the main wines that investors were interested in. You can draw your own conclusions from what you see here. Of course you have to net out the costs of doing business (spreads, storage etc), but at Amphora we believe these can be offset by judicious selection of the right wines for investment purposes, in other words, those offering the best relative value. And by switching as and when appropriate.
One of the easiest things to do during periods of turbulence such as we are experiencing now in mainstream markets is to overreact. Selling in panic and buying back later when things seem better can seriously damage your investment health. So can waiting for the ‘right time’ to plunge in. None of us ever know when that is. The best, and indeed the only thing to do is accept an appropriate term for your investment, and spend time in the market, a point we hope the above charts amply illustrate.
Philip Staveley is head of research at Amphora Portfolio Management. After a career in the City running emerging markets businesses for such investment banks as Merrill Lynch and Deutsche Bank he now heads up the fine wine investment research proposition with Amphora.