Are luxury investments once again a safe-haven as Covid 19 sweeps the world?

The question isn’t unexpected. Luxury investments do have something of a safe-haven status and generally performed relatively well following the last financial crisis in 2008.

Some people are certainly hoping that will happen again - I have just received one email promoting a new wine fund off the back of the outbreak - but the situation now is slightly different to what we went through a decade or so ago.

For a start, the physical market for luxury assets wasn’t affected then. Auction sales, which are the main benchmarks for most markets, even if they don’t always account for most sales by volume, continued and things got sold. 

Today, upcoming sales are being cancelled left, right and centre so it’s harder to gauge what is actually happening.

And secondly, the origins of this crisis are not based on the failings of financial markets so it is probably premature to say investors will respond in the same way.

Cash seems to be king at the moment, so if you don’t want to have your money locked up in equities, it certainly wouldn’t make sense to pile it into a far less liquid asset class like, say, art.

HAGI’s Dietrich Hatlapa, who provides the classic car data used in KFLII, says it is far too early to say what the impact will be on the market.

However, in the short term the sector will be affected simply because so many auctions and events have been cancelled and dealerships shut, he points out.

But prices certainly aren’t falling yet. According to the HAGI Top index, which measures the performance of the best investment-grade classic cars, prices rose by 0.55% in January and February, with no dip forecast in March.

Andy Simpson of Rare Whisky 101, who compiles the Knight Frank Rare Whisky Index used in KFLII, also says it is too early to say which direction the market will head, especially as the largest auction house in the sector has stopped sales.

More evidence, however, is available to allow a slightly more detailed look at the fine wine market, according to Nick Martin of Wine Owners, who created the Knight Frank Fine Wine Icons Index (KFFWII), which tracks the value of a broad basket of investable wines from around the world.

Mr Martin says he has noted a recent upturn in activity from buyers in Hong Kong and China who had been almost entirely absent, for obvious reasons, from the market for most of the first quarter of the year.

“Because a lot of the world’s fine wine is traded through London the drop in the value of sterling is making it cheaper for Hong Kong-based purchasers because their currency is pegged to the US dollar,” he points out.

Again though, it would be premature to speculate on how Covid 19 will affect the wider market, he suggests. A potentially bigger impact will be how the ongoing US/EU trade spat plays out. US tariffs on European wine were a big driver for KFFWII’s relatively lacklustre performance last year, he explains.

The spring art market has also been curtailed, says Sebastian Duthy of KFLII contributor Art Market Research. 

“It's still too early to say how auction houses might be impacted by the loss of business but judging by last week’s sales at Christie's and Sotheby's interest was down on this time last year. 

In short, to answer my own question we just don’t know yet whether the Covid 19 virus will prompt people to look to luxury as a way to protect their money, or whether the crisis will hit values as collectors liquidate their assets.

Prices seem to be holding up, but the Q1 results for KFLII, due to be published in April, will give an early indication of market performance. However, it will take longer to clarify if it is Covid 19 or other market factors that are driving performance one way or another.

To see how the 11 luxury investment asset classes tracked by KFLII performed in 2019 checkout the latest edition of The Wealth Report online: 

https://www.knightfrank.com/wealthreport/article/2020-03-03-the-luxury-investment-index-2020-discover-the-worlds-mostcoveted-items