WineFi Expert Insight: Fundamentals and the Past 5 Years

In this week’s newsletter, we’re welcoming our Head of Investment Matthew Small to take us back to basics with some wine market fundamentals, and a guide into recent trends.

Key Characteristics of Fine Wine as an Asset Class

We’ll begin by outlining the key characteristics of fine wine as an investment, and providing a concise review of market performance over the past five years.

A Market Driven by Supply and Demand

The fine wine market hinges on the delicate balance of limited supply and growing demand:

• Limited Supply: Top producers release only a small quantity each year, and vintage quality can vary.

• Increasing Rarity: As bottles are consumed or damaged over time, they become rarer, which boosts their value.

• Rising Demand: A surge in global wealth continues to drive demand and push prices ever higher.

Beyond long-term price appreciation, fine wine offers several attractive benefits to investors.

• Diversification: Fine wine has a low correlation to traditional assets like stocks and bonds, enhancing portfolio resilience.

• Tax Efficiency: In the UK, fine wine is considered a ‘wasting asset’ and is therefore exempt from capital gains tax.

A Look at Recent Market Performance

With those fundamentals in mind, let’s take a look at how the market has actually performed in recent years.

The WineFi Price-Weighted Index, which captures the performance of the entire WineFi investment universe, reveals two distinct chapters over the past five years.

The Covid Boom (Shaded Purple)

During the pandemic, stimulus cheques, furlough payments, and business loans injected extra cash into people’s accounts. This surge in money supply boosted the value of fixed assets, including fine wine.

With fewer opportunities to spend on travel or entertainment, many households had more disposable income – money flowed into alternative assets like fine wine.

The results were dramatic, with the Liv-ex Burgundy Index climbing by 50%, and the Champagne Index climbing by 60%.

High Inflation and Rising Interest Rates (Shaded Blue)

However, all that stimulus came at a cost. Inflation soared, prompting central banks to raise interest rates. While fine wine is a powerful diversifier, it doesn’t operate in a vacuum.

As rates climbed, fine wine became less attractive compared to safer, interest-bearing assets. Higher borrowing costs also pressured merchants and collectors, leading to more selling.

On the consumer side, higher rates incentivised saving over spending, softening demand.

Together, these factors triggered a market correction, with prices retreating from their pandemic highs.

Fine Wine’s Correlation with Interest Rates

1. Lagging Correlation with Interest Rates

   The WineFi Index has a delayed response to changes in interest rates. Low rates boosted fine wine prices, as investors turned to alternative assets. When rates rose, wine prices didn’t immediately fall but eventually slowed and corrected, reflecting the lagged effect of higher borrowing costs and shifting investor preferences.
   

2. Potential Positive Outlook as Rates Ease

   Over the past year, central banks have started to lower rates from their peaks. This trend could ease pressure on merchants and collectors, boost consumer spending, and create a supportive environment for fine wine prices going forward. With this lagging relationship, the market could soon benefit from renewed momentum.

To view and invest in our latest opportunity - The Icon Collection - please click the links below