Mark Carney issued a caution at the start of this week that higher prices are on the way. Sterling's performance post the Brexit vote has inflicted growing cost pressures on UK businesses and the BoE Governor has issued a warning of strong factory price inflation ahead, marking the 'first stage of the impact of Sterling's decline, now down nearly 20% against the US dollar since 23rd June.
Inflation expectations have risen around the world in response to President-Elect Trump's plans to increase Government spending in the US. A Reuters poll of economists predicts inflation to rise 1.1% in addition to the BoE's forecast of a 2.7% rise in inflation by this time 2017. Of course nothing is certain right now in terms of Trump's agenda and its ultimate affect on the global economy but an increase in inflation looks likely. So what are the implications for wine assets held by investors?
Dr. Rachel Pownall is quoted in a previous Knight Frank Wealth Report (2013) on the performance of alternative assets including fine wine, that: "Their performance tends not to fluctuate with that of stocks and bonds and they can hold their value during periods of expected inflation. They therefore offer an alternative form of portfolio diversification across assets and economic cycles."
The positioning of a stable asset not directly correlated to financial markets as a component of a robust investment portfolio to hedge against inflationary pressures is well-documented. The price of fine wine tends to increase with inflation and as such is a good investment to preserve wealth in times of rising inflation.
Similarly, fine wine can also be used to hedge against currency devaluation. Sterling's on-going volatility and the very real threat of rising inflation will have investors looking harder for safe havens, particularly in a low-growth global economy. A classic example of this was the 3.3 per cent rise in gold overnight as the US election results rolled in and the consistent rise in fine wine prices throughout 2016 with the Liv-ex 50 climbing more than 20 per cent this year.
A study undertaken by Vin-X at the end of 2015 compared the performance of fine wine versus, gold, property and equities and illustrated clearly that, over the long term, fine wine has out-performed all these assets.
The expression "safe as houses" has been very much evident in the UK but the current Brexit effect has slowed the market and some investors will, without doubt, be looking to shore up wealth protection in bricks and mortar with investments in other alternative safe haven assets.
Transaction costs are very high for property and the investment is very often heavily geared, whereas entry into the fine wine asset market can be as little as £2,000.
In addition to Mark Carney's predictions, credit rating agency Moody's has also revised its predictions for the UK economy in 2017 from the previous 1.2 percent growth in GDP to 1 percent, with a flat-line position beyond that through 2018. Again this negative revision reflects the uncertainty posed by Brexit and is linked to research undertaken by the Institute for Public Policy Research which reports that many financial firms stopped advertising jobs after the UK voted to leave the EU. Furthermore, Moody's rating had been based on the UK managing to negotiate a free trade agreement and there is of course no certainty on this. The Agency stated that a failure to do this could "substantially" worsen sentiment and potentially stimulate a decline in house prices and consumer confidence.
The report also states that: "The rise in protectionist discourse globally could also prove to be a hurdle for the UK, and challenge long-term prospects." Their expectation is that consumer price inflation will accelerate to 2.2 per cent in 2017.
The current economic and political environment and forecasts for next year all point to an extended period of uncertainty and the need for extra diligence over investment strategies. Adding fine wine to your investment portfolio will certainly offer stability and wealth protection.