WineFi Weekly #21

How will an interest rate cut affect the wine market?
A fine wine market update.
📅 August 12th 2024

Interest Rates and the Fine Wine Market

The Bank of England has cut interest rates for the first time since 2020 as inflation continues to remain steady, holding at their two percent target for two consecutive months.

Bank Rate is currently 5.25per cent, a 16-year high where it has been pegged for the last year to fight inflation, but it has now been set at five percent, a drop of 0.25 percentage points.

Wine prices, often regarded as both a luxury item and an investment, are influenced by interest rate changes through various channels. By examining the chart below (which displays the Liv-ex Fine Wine 1000, Bank of England interest rate, and the Consumer Prices Index (CPIH)), we can observe several instances where a drop in interest rates preceded a significant rise in the market – notably in early 2009, mid-2016, and early 2020.

These upward trends can largely be attributed to heightened demand from both consumers and investors. While a reduction in interest rates generally boosts the industry's prospects, those looking to profit may anticipate certain indices to climb more rapidly than others. Additionally, buyers using Euros and Dollars stand to gain from the impact of rate cuts on exchange rates.

The market demand and interest rates dynamic is well documented. For instance, following the onset of Covid-19 in February 2020, the Bank of England reduced interest rates to stimulate economic growth. This led to a surge in spending across various sectors, including the wine industry. Increased disposable income, particularly during prosperous times, tends to boost demand for mid-range wines (£1,000–£2,000 per 12×75), making them accessible to a broader range of consumers.

However - the world of wines that WineFi considers as ‘investment grade’ tends to be above this price bracket. The chart below illustrates the price trends of the Liv-ex Fine Wine 1000 and Liv-ex Investables index since 2006. The Investables index contains a basket of wines at a higher price point than the £1,000–£2,000 per 12×75 listed above.

During the inflationary period from early 2021 to mid-2022, the Investables index exhibited less price volatility compared to the 1000.

This suggests that prices of these wines are less influenced by spending tendencies and more by expectations of future returns, similar to stock prices. This idea is further supported by the sharp decline in the Investables index in August 2011, which coincided with the stock market crash. Buyers investing in wine tend to be motivated less by affordability and more by the perceived stability of the market.

_{Source: Liv-ex}

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What’s happening in the wine world?

The Liv-ex 100 has declined for the fourth consecutive month. Aside from a slight increase in March 2024, the index has experienced monthly drops over the past year. So far in 2024, it has decreased by 4.4%, though it still shows an 11.1% gain over the past five years.

In July, out of the 100 wines in the index, 30 saw price increases, 6 remained unchanged, and 64 decreased in value. While Promontory 2018 led the gains in May and June, Harlan 2018 took the top spot in July with a 16.0% rise in its Mid Price.

Clos des Papes’ Châteauneuf du Pape Rouge 2020 ranked second with an 8.7% increase, followed by Pol Roger’s Sir Winston Churchill, which saw a 6.7% rise. The latter was initially released in early 2023 at £1,950 per 12×75 but recently traded at £1,458, reflecting a 25% drop from its release price.

Champagne Focus

In July, the Champagne 50 halted its recent decline, posting a 0.9% month-on-month increase. Although the index has dropped 27.1% from its peak in October 2022, it remains 41.4% higher than its pre-Covid levels.

Although many Champagne releases in 2024 have underperformed, July saw price increases in older vintages from the Grandes Marques. This trend mirrors the recent developments in Bordeaux, where the Legends 40 index appears to be stabilizing, while the Liv-ex 50, which focuses on more recent vintages, continues to decline. As buyers find less value in new releases, they are increasingly turning to opportunities in back vintages.

_{Data: Liv-ex}

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