You will not hear much commentary about currencies in discussions about the fine wine markets, but it is an incredibly important aspect both from an investment and consumption perspective. The market is denominated in Sterling, simply because the major merchants from 300 years ago operated out of the UK, and it has retained its place ever since.
Earlier this year, one of the reasons being touted for the relative lack of stock building by Asian merchants was that prices had risen quite sharply in USD terms over the prior 12 months. Indeed they had. As you can see from the second chart above, the GBP/USD rate moved from 1.50 to 1.70 over exactly 12 months to 30th June 2014.
Just when the broader market might have been supported by ongoing buying from Asia, the currency markets were doing their best to reduce the likelihood of that happening.
Since the summer, however, a combination of the expiry of the quantitative easing programme in the US, and a perception that the US economy is growing faster than its UK counterpart, has reversed the trend. The rate is now back to 1.57 and as can be seen from the top chart, is back to its 5 year average. We might therefore expect demand to pick up from Asian and other USD denominated buyers.
A recent trawl through our Hong Kong contacts reveals that this is precisely what is happening. We were asked yesterday if such “animal spirits” as had returned to the HK market were on show also back in the UK. (The answer is: yes, to a degree.)
The merchant fraternity in Hong Kong tell us that throughout this period, end-user demand has remained solid. They themselves had earlier over-estimated likely demand, so they had substantial stock positions already. The currency move meant that they had simply drawn down on stock, rather than continue to maintain high levels.
One merchant told us yesterday: “I am in desperate need of inventory.” So it is this re-stocking process which will drive the next leg, boosted by the currency move.
Since around 2005 the Asian buyer has been an increasingly important player in the fine wine game. Fine wine is a luxury good, and when developing economies expand and throw off billionaires a proportion of the wealth finds its way into Western luxury branded goods. Although the rate of accumulation has tapered off over the last couple of years (for reasons as diverse as the Eurozone crisis, the slowdown in China, and a series of clumsy En Primeur campaigns), there is no reason to believe that it lacks the power to become significant again.
Indian investors might see that the INR has had a good couple of months against Sterling. Our own soundings from trips to Mumbai suggest that the majority of people believe that the INR is in structural decline against Sterling. If that is true, then the current strength represents an improved entry point for INR investors, whilst a long term devaluation against Sterling means that a fine wine investment represents a very good currency hedge.
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