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Investing in Fine Wine stocks during a bear market? Here's why it's a good idea

Oshin Ahlawat
21.6.2022

fine wine stocks in bear market inflation

As we are beginning to head into a precarious economic and financial situation at the moment, it is essential now more than ever to invest in assets which can alleviate your portfolio’s risk factor. One of those reliable financial assets is Fine Wines. Fine Wines have a proven track record of stability and low correlation to market volatility.

Several factors are responsible for this volatility, for example, the increase of sanctions on Russia by the West and the rising price of energy. Value of government bonds, gold, and commodity prices have escalated as a result and in stark contrast to equity markets.

It is more than likely that inflation could rise further due to higher energy prices in the highly liquid and uncertain backdrop. Market volatility will most likely persist for the near future, and some investors may even choose to keep their liquid assets just to maintain flexibility.

The impact of inflation on Fine Wine as an asset class

The defining character of Fine Wine as an asset class is by its degree of imperviousness from volatile and unpredictable shifts in the financial market on a macro scale. You might be wondering why exactly Fine Wine behaves so independently from such precarious financial situations? Well, the defensive nature of Fine Wine makes it less liquid than stocks or bonds in comparison.

They cannot be sold as quickly as stocks or bonds during a market major shock, which in turn helps insulate them from sharp selloffs. Consequently, they are able to form a more reliable store of value than highly liquid assets.

In the near future, the impact on fine wine markets may be less direct or severe. According to the Liv-ex 1000 index, the broadest measure of the market, fine wine climbed 1.6% in February, maintaining a rally in place since mid-2020. There could be some short-term effects in the coming weeks, but it is unlikely that there will be significant week-by-week market swings as we see might in other asset classes. .

For example, Fine Wine has been able to hold up relatively well during the largest market crises in recent history. You can see in the graph below the lowest point of fine wine’s downturn during the Global Financial Crisis and the COVID-19 outbreak. Liv-ex 1000 Fine wine investments correlation

Source: Cult Wines

Long-term return potential

As inflation in most major economies hit multi-year highs in late 2021, fine wine’s performance, as measured by the Liv-ex 1000, had accelerated. Even with the rising energy prices is expected to further fuel inflation, it is safe to say that fine wine’s status as a real asset could support sustained demand during this unpredictable inflationary backdrop by providing an important medium of portfolio diversification for both seasoned and amateur investors.

Fine wine has maintained a low correlation to equity markets due to its "internal supply-demand dynamic"- the primary driver of its market prices. It is essential to hold diverse sources of potential returns especially amid these volatile financial times.

According to Sharpe Ratio, which is a measure of the average return of an asset in excess of the risk-free rate and relative to its volatility, fine wine has shown better risk-adjusted returns in comparison with other investing options like gold, commodities, government bonds, and equities.

The higher the Sharpe Ratio, the higher an asset’s risk-adjusted return. Fine wine had the highest ratio of 1.58 in comparison to others which all had a score lower than 1 except for equities which came in second with a 1.07. Fine wine sharpe ratio volatility

Is this a good time to invest in Fine Wines?

Yes. The answer is yes. The past year saw soaring prices for many iconic wines, including several Burgundy ones, with more investors who are seeking stable, long-term regions, producers, and wines to invest in and diversify their portfolios.

Bordeaux and Italy as regions where relative value improved the most over the past year. The interest in these lower-risk fine wines could be correlated to increase in appeal of low-risk asset classes in the current uncertain inflationary environment.

Investing in fine wine is a long-term endeavor, not a short-term commitment. It will be wise to recognise that fine wine may not remain entirely immune from the volatility in the medium to long term. It might have an impact on fine wine by reducing inflows into the asset class for a short time, but it is very highly unlikely to expect any prolonged and long-lasting slowdown.

Thinking of diversifying your portfolio with fine wine stocks or shares of a professionally managed portfolio? Through Konvi you can access fine wine portfolios from leading investment vehicles and participate in their value development through shares from 250€.

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