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I’ve been looking forward to writing this post for a while. There is a lot of debate about how wine is doing in this recession. Now we know. As you know we have been in a great period for investing in wine. The price of wine on the secondary market has gone up and up. Not only has this been good in absolute terms, but also relative to other forms of investment as there has been nothing to touch wine in the last four years.

So after a tremendous bull market for wine how does it perform in a significant downturn? Just last month we saw how this plays out, as the figures are now in.

We have two sets of numbers to compare with, the Liv-Ex 100 shown below. This follows the UK wine market

Here is link to the graph and a broader explanation.

Now we also have the WinePrices.com benchmarks. I will be commenting more fully about this site in a future post, but for now I can say we have at last got free information about wine indices, in a good usable format, on the US secondary wine market. Shown below is the Fine Wine 100 Index

Here is a link to the graph and a broader explanation.

There are a lot of hypotheses about how the wine market will perform in a down-turn. We’ll address each one in turn.

1/ The wine market was a bubble that has burst – FALSE.

We are being a little premature with this but the indications are that there has been a correction and that a healthy return will now continue. This obviously depends on what happens to the economy next. The basic fundamentals are all in place for a continued run. The vast Chinese market is coming online. The supply of the top wines isn’t going up. The very top wines, although very expensive, are still well within reach for the very wealthy. If you look at the Fine Wine 100, the biggest drop was in the third quarter of 2008 and it did drop even faster than the Dow. However this was the only quarter that his occurred. The return to an upward movement has continued.

2/ The wine market is not correlated with financial markets – FALSE

At all other times, this has been true, even until mid last year. However the global recession was so deep and so pervasive that eventually it caught up and the wine market declined in lock-step with the financial markets. I would say that this is an aberration caused by the depth of the recession. Usually the wine market is one of the most un-correlated of investments

3/ The wine market lags the financial market when going into recession – TRUE

Now bear in mind that the stock market typically declines before a recession can be called. This was true in the third quarter of 2007. Most economists state that the recession started in the second half of 2008. However the wine market clearly declined after the stock market in the second quarter of 2009.

4/ The wine market leads the financial market when coming out of recession – TRUE

The financial market started to pull up half way through the first quarter of 2009. The wine market was one quarter ahead of it. OK, one quarter is not a long period of time, but it can make a big difference to a total return.

Again, I admit to jumping onto the band-wagon early, and it will be interesting to see how things play out both if the economy continues to improve or if we are in for a classic ‘W’ (another drop coming up).

So far, wine is standing up as a good way to diversify your portfolio.

8/9/2009 | Investing | Post comments | View comments | (1)