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12 October 2009Shares and Wine are booming – true or false

Today, the UK stock market (FTSE) closed at a one year high – its highest point since September 2008. Since the bottom was reached in March this year, the FTSE has gone up by 44%.

At the end of last month, the Liv-ex 100 - widely regarded as the most reliable gauge for the Fine Wine market – was up 12.2% year-to-date although still down 9% on last year. From the bottom in December last year, it has gained 15%.

What is going on here? Surely the world hasn’t changed that much since the financial world was imploding last year to warrant such a rebound ? Or has it? The real economy is still reeling from what happened. Unemployment is very high and rising. Production is still low with massive overcapacity so any investments in increasing it are not likely. Governments around the world are facing massive debts that have to be somehow repaid. Consumers are laying low, either because they just don’t have the money or because it has become unfashionable to be seen spending.

So why, if the real economy is struggling, are wine and shares going up?

I think because for starters, these 2 markets don’t have much correlation to the real economy. Of course, stock markets look at corporate earnings, which are partly dependent on spending habits of the public at large. For another part though, these indices are made up of a lot of companies that don’t have an intimate relation with the real economy. I’m thinking of banks and companies involved in commodities, who I’m sure make up a significant portion of any stock market. And these sectors seem to be doing rather well.

Fine Wine is even less correlated to mass spending habits. Especially the top wines from Bordeaux. These are either bought and consumed by people who had and still have lots of money, or they are being purchased for investment reasons.

There is an astonishing amount of cash looking to make a return. Interest rates are far too low to attract this money so it has to go elsewhere. The point I would like to make is this: in order for this money to be at work, in the stock- or wine market – there needs to be a relative stable and certain investment climate. After all, the main reason why both markets went down so much is uncertainty.

At the moment though, there seems to be relative consensus over the immediate future of the economy: it will be hard for several years to come and any upturn is likely to be small, but at least there doesn’t seem to be a substantial risk of things going haywire anymore. If the major obstacle of uncertainty is largely out of play, focus will once again turn to making rather than protecting money. And as said: there’s lots of it that need to make a return. Given the fact that both stocks and wine still are well below their alltime highs, it might not be such a strange thing that all this cash is piling in again.

Having said that, I still experience a nagging feeling of unease. It has all gone up a bit too quickly for comfort, I feel. Stock markets have a habit of fluctuating and I feel a correction is due. Focussing on the Wine Market, there are 2 elements that contribute to that unease. The first one is that the wider Wine Market, beyond the most coveted wines, is not moving up. The second element is that the increase in the Liv-ex 100, is for 75% due to Lafite Rothschild. Not the typical top 8 investment wines, just Lafite. Moreover, that 75% is not just due to one Chateau, it’s carried by demand from just one, albeit massively big, country.

What is encouraging though is the fact that a good number of Wine Investment Funds are buying, and not just Lafite.

The conclusion? I don’t know. There are enough fundamentals to support the Fine Wine market: loads of cash waiting to be employed, no feeling of major economic uncertainty around the corner, vast demand from a massive and growing new wine market and the fundamentals of Fine Wine are unchanged (ever diminishing supply has to drive up prices as long as demand is there). What I would like to see though is a wider demand than just for Lafite and just from China in order for me to answer the question in the title with a resounding "true".


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