Correlation

by Wine Owners

Posted on 2017-11-28

Although wine markets have generally appeared not to correlate with the global economy over the last decade, we would not be surprised if this has changed from 2016 onwards and for the next 5-10 years.

Look back in time to the recession of the early 1990s, the Asian Crisis of 1997, the dotcom bust following Y2K, and the Iraqi invasion of Kuwait in 2003; and you will see that all these events that negatively affected global sentiment and equity markets also affected the fine wine market.

Go back further to the oil crisis of the 1970s, and wine plunged then too. But that was a different epoch.

Whilst the fine wine market has further globalized and broadened since the mid 2000s, people are still people: with the same human response to economic positives and negatives; that in turn reflects in levels of investment, spending and so on.

The fact that this is a discussion at all is down to the banking crisis and what happened in the period 2009-2015. Initially as stock markets tanked, the wine market rose, then rocketed in line with commodities and safe haven assets such as gold bullion.

But it was counter-intuitive. The response of the Bordelais in April 2009 was rational, to cut release prices to levels not seen for several years.

This was largely due a discontinuous, one-off event, namely China’s rapid industrialization, and what that did to commodity prices. In our opinion this does not mean that fine wine correlates with commodities. Or gold. As variously has been posited. You could just as easily correlate corruption, grafting and the adoption of fine wine as an alternative store of value for various indirect purposes within China during that period.

Wine is not a commodity. It happens to be one of the most commodity-like luxury collectibles, but that is not the same thing.

Wine is not a safe haven asset like gold bullion. When the world goes south wine warehouses do not fill up.

The basic question is whether wine is a hedge against the economic cycle? Historically it wasn’t. Recently it appeared to be but discontinuities are just that, so it’s not a reliable period upon which to form an opinion. Is the broader base upon which we now sit a game changer, where the laws of supply and demand, and the effect upon that of greater consumption, take over?

Scarcity has relentlessly driven Burgundy and cult Californians to new undreamt of heights, with top Baroli in hot pursuit. Will relative scarcity do the same for Bordeaux, or has the global base broadened at the same time as traditional markets, USA included, have shrunk?

And irrespective of all of the above, will the market continue to punish excessive pricing when things get out of hand?

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