31 January 2019
The Brexit Wine Hedge
Win-win with Vin
By Frank O’Nomics
It’s enough to drive anyone to drink. The whole interminable Brexit charade has left us bullied, bothered and bewildered. Not only is the process never-ending, but also, the whole issue of how to prepare for the consequences of every outcome, is fraught with difficulty and pitfall. Should we invest now or wait until the deed is done? Is it right to buy or sell sterling? While we all look around for attractive stocks, bonds and property we may be over-looking one potential asset that could provide a nice hedge against the nastier Brexit outcomes and still leave us with a rosy glow even if, as some are starting to suggest it “turned out nice”, as George Formby might say. The asset I am suggesting, you may be pleased to hear, is fine wine.
Let me explain. I should at the outset say that I am something of a Brexit optimist. On the whole turkeys don’t usually vote for Christmas and I believe that a deal will ultimately be reached. Further, the resilience and adaptability of the UK economy means that, even what appears to be a relatively disappointing deal can, after a brief hiatus, prove to be little more than a speed bump. On a medium term view I would be optimistic about the outlook for the UK economy and for sterling. With a global slowdown looming this may prove to be a relative view, but the speed of adjustment in the key areas of Europe suggests that we are not in as big a mess as some others. Germany and Italy are already displaying data close to recession territory (German business confidence is at its lowest since 2015) and it looks as if the Eurozone as a whole grew at a slower pace than the UK in the last quarter of 2018.
It looks as if I am in good company. Partly in response to a growing feeling that a “no deal” result has become less likely, a number of forecasters (even before Tuesday’s parliamentary vote) have been revising up their expectations for sterling. Some see £/$ hitting 1.44 by year-end and sterling has rallied 2-3% against both the dollar and the euro year-to date.
But what if I am wrong? There are those who argue that a no deal or a bad deal outcome would undo any recent progress and that the downside remains substantial. I can’t argue that this isn’t a risk, but does that mean continuing to be overly cautious? Alternatively I could hedge my exposure to the UK. One way of doing this would be to buy some currency options. Effectively this means spending a little on protecting the value of my sterling assets, but it is a cost that is just “dead money” if my rosy view is correct. The alternative I prefer is buying some decent French wines. There are three good reasons for this.
The first is that this wine is priced in Euros. If sterling does take a dive then the value of my wine investment will appreciate (in sterling terms) accordingly. This would be true of any euro denominated asset but there are two other reasons pointing me towards wine. The first is that the performance of fine wine as an asset class has been consistently strong for some time. The Liv-ex Fine Wine 1000 rose by 10% last year (a substantial outperformance vs. equities and bonds) and it has risen by 42% over the last 5 years. Clearly my focus would be on just the European component of this, but while Bordeaux has produced more modest returns (27% over 5 years), the performance of other areas stacks up very well – Champagne up 40%, Italian wine up 30% and Burgundy a whopping 103%. The key point here is that, even if sterling does perform well, the potential uplift in the value of the wine could easily offset a decline in value of the euro. A win-win situation.
The third reason? If I am completely wrong and the wine underperforms everything. I can always drink it. Clearly this is an issue if you are tea total, and research by Cardiff University last week showed that a bottle of wine a week costs £2,400 a year in lost quality of life which, if believed (I am very sceptical) points to the strong economic benefit of abstinence. However, in most scenarios buying fine wine as investment means holding it “in bond” and selling it, rather than consuming it.
2017 was supposedly a good year for Burgundy, both in terms of quality and levels of production. The wine industry either argues that high prices are justified by low yields (as in 2016) or high quality (2017), but they seem to get away with it. It is currently the season for Burgundy en primeur offerings and wine merchants tell me (surprise, surprise) it is selling out fast. It sound as if there may already be good support for the Brexit Wine hedge, and if I may conclude by quoting Goethe: “Life is too short for bad wine”.
