Knight Frank Luxury Investment Index update: Fine Wine

A couple of takeaways. Firstly, investment-grade wine can be a pretty good hedge against a catastrophic drop in equity markets. 

While stock exchanges around the world have tumbled since the outbreak of Covid-19 – the FTSE 100, for example, shed almost a quarter of its value in the first three months of the year - KFFWII remained unchanged.

However, Nick Martin of Wine Owners, which compiles the index, points out that this hasn’t always been the case.

“During the oil crisis, the 1991 recession, the 1997 Asian crisis, the bursting of the dotcom bubble and the first invasion of Iraq equities and wine were pretty well correlated.”

But since 2008 there has been no obvious correlation, he explains. “The China market opened up, the quantitative easing taps were turned on in response to the banking crisis, and alternative asset prices inflated.”

Our second takeaway? A balanced portfolio is key. Unlike some wine funds KFFWII is less skewed towards Bordeaux and consists of a much broader range of wines from around the world including Burgundy, Champagne, northern Italy, and California.

Drilling down into the constituent parts of KFFWII the key Bordeaux First Growth Market is down 5% year to date, while blue chip Burgundies, although increasingly volatile, are up 5%. California is flat and Champagne is up 1.5%.

And the final thing to note? Exchange rates play an important role, with much of the fine wine trade centred around London. 

As the chart shows buying activity from Hong Kong has rebounded sharply recently.

“Sterling movements do seem to correlate with increased purchasing,” says Nick. “Last week’s drop in value was an opportunity for those spending dollars or currencies like the Hong Kong dollar that are pegged to the greenback, to buy with a currency advantage of circa 11%.”

Much of the Hong Kong trade is driven by brokers who are always on the lookout for opportunities like currency plays, he adds. “This supports the pattern of buying from Hong Kong where we are seeing a higher percentage of First Growth purchases compared to anything else.”

Whether the Hong Kong activity bounce continues remains to be seen, says Nick. “Much will depend on the removal of uncertainties weighing on the Bordeaux markets including whether US tariffs on European wine are lifted or not.”

Note: KFFWII is part of the Knight Frank Luxury Investment Index, which tracks the value of 11 asset classes including Hermès handbags, classic cars, art and rare whisky.

*Buying activity refers to trades on the Wine Owners trading platform.