Investors reach for the bottle as inflation soars

September 7, 2022

As inflation rates continue to soar, investors are looking for other ways to protect their money. Many have turned to the wine market, which has seen impressive returns in the past year.

The Liv-Ex Fine Wine 100, which tracks the price movement of 100 of the most sought-after fine wines, has delivered 18.7 per cent of returns in the past 12 months.

The FTSE-100, meanwhile, has climbed around 4.91 per cent in the same period. Gold, which is often seen as a safe haven asset during periods of economic uncertainty, has basically been static in value since last year.

So, if you’re looking for a more stable investment option than stocks or gold, wine could be a good choice for you!

What are the economic factors at play here?

Currently, inflation in the UK is at its highest level in forty years, climbing 9.4% in the 12 months to June 2022. This is largely due to the sharp increase in the price of crude oil, which has risen by around 15 per cent since July.

The Bank of England has responded to this by raising interest rates 0.5 percentage points to 1.75% This is likely to put further upward pressure on inflation in the short-term, as it will make borrowing more expensive.

But in the longer-term, higher interest rates should help to cool the economy and bring inflation back down to its target rate of two per cent.

The global economy is also turbulent, with trade tensions between the US and China continuing to rattle financial markets. Coupled with the ongoing impact of the pandemic and the knock-on effect of the conflict in the Ukraine, there is a lot of uncertainty in the air.

In times like these, many investors seek refuge in so-called “safe haven” assets such as gold, which is seen as a store of value that can hold its worth even when other asset prices are falling.

Why fine wine makes for such an effective safe haven

Commodities such as gold and oil are often used by investors as a way to hedge against inflation. But there is another asset class that can offer protection against rising prices: fine wine.

Fine wine has outperformed other assets in times of economic uncertainty and market volatility. In the aftermath of the Brexit vote, for example, while the value of sterling plummeted and the stock market went into freefall, the Liv-ex Fine Wine 100 Index, which tracks the prices of the world’s most sought-after wines, rose by over five per cent.

And it’s not just in times of economic upheaval that fine wine has shone. Over the past two decades, the returns from investing in wine have been far higher than those from investing in shares, bonds or even gold.

So, what is it about fine wine that makes it such a good investment?

Fine wine is a rare commodity with a limited supply. There are only so many top-quality wines in the world and, as global demand for these increases, prices are pushed up.

As a finite resource, fine wine is also less prone to the sort of volatility that affects other investments. Prices may fluctuate in the short term, but over the long term they have a tendency to rise.

What’s more, wine is a tangible asset that can be stored and enjoyed, unlike shares or bonds. And as an investment, it offers diversification away from more traditional assets such as stocks and shares.

There are also new markets opening up for fine wine in Asia and South America, where a growing middle class is increasingly interested in wine as a status symbol.

In fact, the demand from these markets resulted in the Liv-ex 1000 growing by point four per cent, where gold slumped by 2.8 per cent, and the FTSE-100 fell 3.74 per cent in the second quarter of 2022.

These markets are still relatively undeveloped, which means there’s potential for strong growth in the years ahead.

As with most commodity markets, fine wine is also insulated, to a certain extent, from the impact of inflation. This is because there is always a solid demand for wine, no matter what the economic conditions.

So if you’re looking for an investment that can offer you some protection against inflation, as well as the potential for strong growth, then fine wine could be worth considering. Just remember to do your research first and invest in a way that suits your risk appetite.