The investment-grade wine market has experienced a decline in 2023, resulting in lower prices and fewer transactions. However, industry experts believe that this presents an attractive opportunity for new investors to enter the market, as it is expected to maintain its strong trajectory. Despite the increased accessibility, wine investing is not for the faint of heart. Prospective traders must navigate unique tax rules, the threat of fraud, and the potential for unforeseen events overseas to affect performance.
The growth of the investor base for fine wine has been significant in recent years, thanks to the increasing affluence of consumers, user-friendly trading platforms, and a decrease in the minimum investment cost. However, the Liv-ex Fine Wine 1000 index, the broadest market index available, has experienced a 9.5% decline since the beginning of 2023. Industry experts consider this a temporary demand blip that is unlikely to disrupt the market’s momentum. The Liv-ex Fine Wine 50 Index, which tracks the world’s top Bordeaux wines, has seen a 10.3% decline. This decline is already at the limit of what experts expect for a full calendar year and is more pronounced for higher-priced wines.
Former investment banker Jeremy Howard describes this decline as a correction and an opportunity for new investors to enter the market. He believes that it is not ideal to buy at the peak of the market, and he himself has been making purchases recently. Over the long term, investment-grade wine has shown significant growth, with the Liv-ex investables index delivering a compound annual growth rate of around 10% since 1988.
While the performance of investment-grade wine over 30 years may attract attention, its role in an investment portfolio is more complex. Less than 1% of the wine produced globally is considered investment-grade due to its quality, limited supply, brand equity, vintage appeal, and aging potential. Wine is an uncorrelated asset, meaning it can act as a low volatility hedge against market upheavals in bonds or equities. Wine is also a physical, tangible asset that typically performs well against inflation. However, customers are willing to pay higher prices for fine wines due to their lack of substitutability.
One crucial factor in favor of investment-grade wine is the evolving wealth demographics globally. As people become wealthier, they tend to seek out status symbols associated with European luxury brands, including fine wine. Thus, even if there is a period of weakness from one region, there is usually strong demand from other regions with growing middle classes. The investment-grade wine market is priced in sterling, so returns are affected by the performance of the pound.
The UK is an ideal place to invest in fine wine due to its tax-efficient and secure bonding system. Wine is stored in bonded warehouses approved by HMRC, with duty and VAT deferred until the wine leaves the warehouse. This makes the investment effectively tax-free and the assets secure. However, the drawback is that investors cannot take possession of the wine without incurring tax. HMRC also considers fine wine a “wasting asset,” exempting it from capital gains tax upon sale. However, this does not apply to fortified wines like port.
While wine is considered a low volatility asset, unforeseen events can temporarily impact the market, such as regulatory changes. One notable example is Xi’s emergence as China’s leader in 2012, which led to an anti-corruption campaign that affected fine wine imports and prices. Investors should be aware of the risk of fraud, which has long plagued the market. Fraudsters set up fake companies and contact wine owners offering to buy their collection above market value. It is crucial to stay vigilant and verify the legitimacy of such offers.
In conclusion, the investment-grade wine market may have experienced a decline in 2023, but this presents an opportunity for new investors to enter the market. Despite the risks and challenges, investment-grade wine has shown significant growth over the long term. It is important to understand the nuances of wine as an investment and consider factors such as quality, limited supply, brand equity, vintage appeal, and aging potential. The evolving global wealth demographics and the UK’s tax-efficient system make it an attractive place to invest in fine wine. However, investors should remain mindful of unforeseen events, such as regulatory changes, and the risk of fraud.
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