There are a few buzzwords in the business that bring about strong feelings in the financial sector. The collaborative economy, open-source software, payment gateway, real-time information discovery … the list goes on and on. But there is one word that strikes fear into the heart of all financiers. Inflation. Inflation to financiers is like a trip to Tiffany’s for your commitment-phobic boyfriend. The upward curve where goods go up and spending power goes down means that there is less money to go around. Put simply, as the cost of living gets higher morale gets lower.
With post-pandemic rising costs and the price of crude oil spiralling out of all control, making sure your money is safe is the number one concern for HNWI and UHNWI. Investing intangible goods, such as wine, has become one of the preferred methods of protecting money long term, even when times are hard.
How Does Inflation Affect Investors?
After the 2008 recession, governments worked hard to keep interest rates low, being able to keep inflation under levels of control for almost 15 years. This allowed investors and consumers to continue with their financial operations as usual and more importantly, create and maintain active trade portfolios. However, 2020s pandemic borrowing, followed closely by 2021 political uncertainty, is now making average consumers’ budgets tighter than ever.
Regrettably, that means inflation is back with a vengeance. Inflation in the UK hit an all-time high of 5.4% in 2021, while the war in Ukraine has sent energy prices through the roof, setting the bar even higher.
For consumers, this inflation means higher prices on a day to day goods, resulting in a loss of purchasing power. Naturally, this presents challenges for everyday investors – basically, there is less money in the pot to go around. And even if there is an investment plan in place, investors want to know what they can do to protect their portfolio and assets against unpredictability should inflation continue to rise.
What Are Inflation Hedges?
It’s not all doom and gloom though. Some assets, called inflation hedges, are known to be protective during times of uncertainty. These placements safeguard the investor against the decrease in purchasing power of paper money. Traditionally, bonds, gold and property have been seen as excellent inflation hedges, and many investors make sure they have a percentage of these in their portfolio. However, with fine wine far outstripping both gold and property during 2021 (with capital gains of a staggering 16%), it looks like there is a new inflation hedge on the block.
Should I Invest During Inflation?
Investing during times of inflation can be a gamble at best. But don’t despair; if you choose the correct equity and preserve your portfolio’s value, inflation investment can see you reap long-term gains. Let’s put some figures on it – the annual return of the S&P Index (the mutual fund company that tracks the US’ top 500 companies) is about 10%. Inflation during this period was about 8%. With this in mind, clever investors could in time outrun inflation.
Tradition dictates that having a portfolio of tangible investments (i.e. equities) is the only good way to stay ahead of inflation. And don’t just take our word for it. Eric Henderson, president of the annuity business segment at Nationwide Financial agrees, “Equities can be volatile but for the long run that has been a winning formula in the past.” Fine wine, with its long investment horizon, offers investors a chance to safeguard their assets during times of volatility. “Take the long-term view, not the short-term view,” said Henderson. “Don’t overreact to short-term pressures.”
Of course, there are pros and cons to every investment hedge asset. Nothing is ever foolproof, and it is essential to remember that assets can go down as well as up.
- Pros: Investing during a time of inflation preserves your asset’s worth. This tangible equity will grow in correlation with inflation, giving you a very healthy nest egg when it comes to selling. Additionally, diversifying your portfolio or spreading the risk across several asset buckets is a time-honoured way of fighting inflation as well as growing your assets.
- Cons: A diverse portfolio means that you are more exposed to risk, albeit from lower levels. This type of portfolio can also divert your attention from long-term gains. Finally, any capital gains earnt from tangible assets are only accessible once that asset has been sold (as opposed to on a monthly basis such as with a traditional stocks and shares portfolio).
The Pros of Wine Investment During Inflation
Stability
Fine wine is today considered as an alternative to gold. This is because of its extraordinary stability, regardless of market fluctuations. For example, at the start of the 2020 COVID-19 pandemic, experts noticed that fine wine’s downturn was minimal and even better, short-lived. The asset had fully recovered after three months and had even grown by the year-end. But investing in wine is a waiting game and not for aggressive investors who look for high-risk investments in the hope of chasing high returns. Fine wine offers stable returns over a long time horizon, ultimately combating rising inflation.
Long-Term Returns
Since its inception in 2004 Liv-ex, the British-born company that is today the worldwide reference for tracking the fine wine market has seen a 315% return on fine wine in the last 15 years. Even when this figure is adjusted in order to include inflation, the real return still stands at a very respectable 129%. Investors should note that this spike is increasing: the asset showed returns of over 16% in 2021 alone.
Physical Passion Asset
As a tangible asset, fine wine has real value and falls into the supply/demand bracket. Just 1% of the world’s wine is considered investment grade, and this is made in limited quantities. As it enters its drinking window, generally about 5 years after bottling, it begins to improve with age. This window stays open for perhaps 20 years (up to 50 in some cases), during which demand grows, and supply becomes increasingly rare. Fine wine’s literal liquidity means that it is a covetable item. Thus the asset is “protected” in some way from market volatility. During the last high inflation environment during the 1990s, wine prices were stable while investment saw some of its greatest returns.
Fine Wine vs. Other Luxury Investments During Inflation
We have long been extolling the benefits of investing in fine wine, but please don’t just take our word for it. According to the famous Knight Frank Wealth Report, fine wine delivered a huge 16% return in 2021, one of the highest returns of the year. This new data cements fine wine as a top-performing luxury investment, equalled only by collectable watches (which saw the same 16% ROI over the same 12-month time period).
According to Frank Holmes, CEO of U.S. Global Investors alternative investments and luxury goods fight inflation and are” one of the few assets that raise prices without experiencing huge profit losses.” Data seen below from Knight Frank confirms this.
| Asset | 12-month % change | 10-year % change |
| Wine | 16 | 137 |
| Watches | 16 | 108 |
| Art | 13 | 75 |
| Coins | 9 | 64 |
| Rare whisky | 9 | 428 |
| Handbags | 7 | 78 |
| Cars | 3 | 164 |
| Jewellery | 2 | 57 |
| Coloured diamonds | 2 | 23 |
| Furniture | 1 | 19 |
Source: Knight Frank Luxury Investment Index results Q4 2021 (KFLII)
Fine Wine vs. Gold During Inflation
When mentioning gold and investment in the same sentence, images of Scrooge, money heists and thieves stealing bars and bullion spring to mind. And it is not without reason. Gold is traditionally the single most viable asset to own come hell or high water. It has performed well for centuries and stood firm during past turbulent times.
However, gold has not glittered of late. 2022s period of high inflation stretches back to early 2021 when gold’s performance was not as shiny as it had once been. Gold prices sank by -3.64% in 2021 (USD/ounce) while inflation grew at an unprecedented rate during the same time period. Fine wine, however, surged to unprecedented highs. All data points to a new contender for those who want to diversify and hedge their assets during inflation, and its name is fine wine.
Do you feel ready to invest in wine? Learn how to here!