What The Weakening Pound Means for Your Wine Portfolio
Further reading
- If you’d like to know how to build a wine collection, read all about it in This Detailed Article.
- Also, explore the best French Wines we handpicked for you. And check out these wonderful Moet Champagnes.
The pound hit a two-year low in May, creating opportune investing conditions for Vinovestors
Wine prices have been decreasing over the last few months. After some digging, it turns out there was a good reason for the decline - the British pound. Even better, the decline isn’t actually a decline at all. Let me explain.
How Wine Prices Work
Let’s start with an analogy. All oil sales are quoted in US dollars. Why? The dollar is the most widely used currency in the world. The popularity makes it easier for exporters to invest their proceeds because they don’t have to constantly convert currencies with each sale.
The same framework applies in the fine wine industry. The difference is that majority of fine wine traders use the Great British Pound (GBP) for the latter. When you see the value of a wine in your portfolio, it is based on the value of the British pound.
Now imagine that you’re a wine investor who doesn’t live in the United Kingdom. (A big stretch, I know.) If you saw your wine portfolio valued in GBP, the actual value might be unclear. The value would make more sense if it were listed in your native currency. That’s why Vinovest converts portfolio values from GBP to US dollars. That’s also where the problem arises.
How the Foreign Exchange Rate Impacts Wine Prices
There’s no way to sugarcoat it - the British pound has been volatile in 2022. Most notably, it has weakened compared to the US dollar. One year ago, a single pound was worth $1.40. As of May 5, 2022, that same pound is worth $1.26.
Now let’s imagine that you had invested in a $140 (£100) bottle of wine at the start of the year. Today, that wine is worth $126 (£100) because the pound has lost 10% of its value compared to the dollar. The wine has remained the same at £100. The exchange rate has not.
To illustrate, here are the normalized year-to-date returns for Vinovest wines in dollars versus pounds.
Fine Wine at Discounted Prices
If you’re an American or Hong Konger, cash register sounds should be going off in your head. The pound falling in value is a golden investing opportunity. The US and Hong Kong dollars (HKD is pegged to the USD) are gaining value in relation to the pound, meaning you can get more wine for the same price. Think of it as a built-in discount every time you invest.
That’s not all. Fine wine continues to hit set record highs. The number of fine wines traded month over month has risen by 19.6% and the value of traded wine rose 21.5%. Plus, fine wine’s year-to-date returns look absolutely divine considering that the S&P 500 is off to its worst start in 83 years.
Year to Date Returns
- Burgundy: 18.6%
- Champagne: 9.4%
- California: 6.7%
- Rest of the World: 6.4%
- Rhône: 5.1%
- Italy: 3.9%
- Bordeaux: 3.2%
Source: Liv-ex
Fine wine has been a rare beacon of stability for investors in 2022. Despite rising inflation, stalling stock prices, and a land war in Ukraine, the fine wine market has continued to march to the beat of its own drum. Case and point: Vinovest has delivered an average 5.6% return across all client portfolios in the first quarter.
The Bottom Line
A majority of wine prices are denominated in British pounds. Those prices move based on how foreign exchanges value the pound. So, while wine prices have appeared to decline in recent months, it’s only because the pound has weakened in relation to the dollar. Meanwhile, wine investors who use dollars can take advantage of extraordinary investing opportunities, thanks to the favorable exchange rate.
