As we inch ever further away from a COVID dominated market, it is important to not be blinded by the event. The Fine Wine market was in a state of retracement and had been for nearly a year with COVID a final flourish, not a protagonist. More so than ever it is crucial to analyse opportunities closely and look beyond simple mean reversion.

At BiBO we see the past 2 years worth of price action within the Fine Wine market as a necessary and natural market cycle. From mid 2016 until late 2018 the wine market enjoyed an almost uninterrupted period of steady, positive performance. The inflating prices at the top end had the effect of a tide raising all ships. Certain tiers of wine were in 2019 beginning to appear clearly priced beyond their objective quality value. This over inflation of values is an entirely normal economic fact, it is why mean reversion is such a tried and tested theory. Academic posturing aside, the ultimate fact is that the market was very overextended. When in this vulnerable position, all that is required to begin the reversal is a negative event or catalyst. In Fine Wine’s case, the primer was the brooding trade war between China and the U.S with the Hong Kong Riots the starter’s pistol.

The subsequent roll over and sell off was not dramatic, price moves in wine never are. However over the course of the following 8 months prices inched steadily lower. COVID then was not the protagonist of this negative move, but provided the anchor leg at the end of a torrid 18 months. It should be noted though that through this major retracement, the wine markets investment index, Liv-ex Investables lost 5.2%. This acid test of the wine market once again served to show off the asset classes resilience and stability.

As mentioned COVID’s arrival pressed prices to their lowest possible ebb and concluded the year long bearish move. In retrospect this final market driver has provided incredible clarity for wine pricing. The prices at which the market bottom must have been the point of true value. Deduced from the settingUnder duress the market decided this was the price they would buy at and this is the price at which sellers would not go lower than. The result, forced equilibrium.

The current state of the market is a very healthy one. Stock that pre-2019 was valued well beyond a reasonable value level has been returned to a more accurate pricing tier. While stock that was of genuine quality and therefore became discounted throughout the event, has returned to pre-COVID levels and will likely continue to kick on. A classic market cycle suggest after a bottom comes a period of accumulation. The smart money is in having bought at the lows, now follows the rest of the market. This positive weight accumulates and typically sends the market into the next bullish extension.

Phases of a market cycle. Source: Investopedia