The future is an impossible place. Every year the world’s financial pundits have a go at forecasting it and pretty much every year they are wrong. Indeed, if they had any sense they’d have given up long ago. Still, they haven’t, and no one appears to mind much if they keep getting it wrong – the financial commentary market seems to be a remarkably forgiving place. With this in mind, we’ve asked some of our writers and some of our favourite analysts to tell us what they think might happen during 2006…
The main talking-point in the fine wine market at the end of 2005 was the UK chancellor’s remarkable U-turn on Sipps in early December.
Before Brown announced that wine wasn’t going to be a Sipp-allowable investment after all, collectors and traders were busy buying wines they planned to pour into Sipps from this April, helping push prices up 17% in 2005.
The obvious conclusion is that there is now going to be a wholesale sell-off in the wine market during 2006. Our suspicion, however, is that there won’t be.
For starters, the UK is hardly the only country where people like to buy fine wine: demand from new markets such as Russia and China has also been significant in the last few years, as has that from Europe, Asia and America.
Second, the Sipps debacle has given fine wine investment a huge amount of positive publicity: there are now several new managed funds due to tap this market in the next year or so.
Fine wine’s growing legitimacy as an asset class will no doubt be helped further in 2006 by a new book, Wine Investment for Portfolio Diversification by Mahesh Kumar, perhaps the most thorough piece of academic analysis on investing in fine wine ever published. The author has constructed an index of 50 wines, made up of the best Bordeaux names. He has then observed and contrasted the performance of his index over rolling five, ten and 20 year periods against the FTSE 100 and UK bonds.
His conclusion? Fine wine not only produces comparable returns to equities, but low volatility and an even lower correlation to the performance of traditional assets makes it a fantastic diversification tool. In the 20 years to 2002, for example, Kumar’s Fine Wine Index produced an annual return of 12.3% against 9.2% for the FTSE 100.
If that isn’t enough to get investors interested, then perhaps the Bordeaux 2005 will be. This looks to be a very good and perhaps exceptional vintage and will be released into the market in June, bringing both additional fanfare and more new money.
The right approach to investing in wine in 2006 would seem to be to buy into weakness precipitated by any Sipps fallout; the only problem with this strategy so far is that there hasn’t been much weakness.
Justin Gibbs is director of Liv-ex.com