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Retail trading boom spills over into fine wine market



In a former Bath stone mine 100ft below the rolling Wiltshire countryside, one low-profile company is benefiting from a renewed thirst this year among retail investors for trading markets.

Octavian — a 1m sq ft wine warehouse holding more than 10m bottles at a temperature of 13C to 14C — has received a surge in business as investors have flocked to invest in fine wines.

“We’ve seen a lot more interest from investors wanting to open an account,” said managing director Vincent O’Brien, whose mine was used to store missiles and torpedoes during the second world war before being converted into a wine store about 30 years ago.

Inquiries have more than doubled compared with a year ago, while new account openings are up 70 per cent. Younger customers, in their late twenties and early thirties, were becoming more interested, he added.

A rollercoaster year in financial markets, in which stocks plunged in March over concerns about coronavirus before rebounding to new highs, has prompted a resurgence in retail investor day trading.

Fine wine, an investment market that has fallen in and out of favour with retail investors over the years, is also enjoying renewed interest this year. While only a tiny fraction of the size of global equities markets, it is wine’s ability to act as a haven, rather than to provide astronomical gains, that has attracted investors.

Fine wine gained 4.7 per cent this year to the end of November, as measured by the Liv-ex Fine Wine 100 index, in sterling terms. That compares with a 14 per cent drop in the FTSE 100 index, a 5 per cent decline in the Stoxx 600 and a 14 per cent rise in the S&P 500, in local currency.

Line chart of how a £1,000 investment would have performed this year showing that it has been a vintage year for wine investors

Wine’s relatively stable performance, which includes a fall of just 1.1 per cent during March’s market turmoil, comes despite the impact of US tariffs on French wine. It also comes in spite of lockdowns in many countries that forced the closure of restaurants, which are large buyers of wine, and made tastings, a key part of the sales process, more difficult.

Tom Gearing, chief executive of £150m-in-assets Cult Wines which held tastings with wineries over Zoom during lockdown, capitalised on growing investor demand this spring. Spotting an opportunity to pick up wines at bargain prices, he raised a £5m special opportunities portfolio in four weeks from 80 investors, of which 31 were new clients to the company. The portfolio is up 17.5 per cent this year, according to Mr Gearing, who was previously a finalist on the UK version of The Apprentice.

Gregory Swartberg, chief executive of London-based wine investment company Cru Wine, who trades the company’s own money and also on behalf of clients, says his book of clients has risen by about two-thirds this year.

“To our surprise, even considering the fact that restaurants were not taking in a lot of stock and tried to sell stock, [the wine market has] seen a tremendous amount of demand coming from private clients,” said Mr Swartberg.

Octavian’s wine storage facility is on the site of a former stone mine in Wiltshire
Octavian’s wine storage facility is on the site of a former stone mine in Wiltshire © Jeff Gilbert/Alamy

And at wine merchant Bordeaux Index, the number of new trading accounts opened is 60 per cent higher this year than in 2019. “Most notably, [wine] did not drop materially during the Covid crisis,” said head of wine investment Matthew O’Connell, adding that “wine has shown little correlation with financial assets during disruptive market events”.

Some parts of the market have been especially fizzy. Liv-ex’s Champagne 50 index rose 8.3 per cent, driven by top-end vintage champagnes such as Louis Roederer’s Cristal, Dom Pérignon and Salon. Bollinger’s La Grande Annee 2008, for instance, rose 27.4 per cent. Italian wine, as measured by Liv-ex’s Italy 100, rose 6.7 per cent.

Both have benefited from growing demand in Asia, at the expense of Bordeaux, while Italian wines have benefited from US tariffs on French wine.

The market’s quirks have also thrown up trading opportunities.

There had been speculation, for instance, that Château Lafite Rothschild would change its famous label for its 2018 vintage, which marks 150 years since the Rothschild family bought the Pauillac winery. Cru Wine’s Mr Swartberg bought a large amount of the wine for clients and the company’s own account this summer.

When the label was released two months ago, it featured a tiny hot air balloon with the letters CL — Roman numerals for 150. Mr Swartberg made a quick profit of about 30 per cent as collectors snapped up the wine, which will not be bottled until next year.

While trading costs remain much higher and liquidity is far lower than in stock markets, there are signs that the wine market is becoming easier for retail investors to access. Octavian this year launched a portal allowing its customers to trade with each other. Mr Gearing’s company advises customers on how they should rebalance their portfolios and uses an algorithm to help determine which wines and regions to buy and sell.

“The days when you would get an allocation of wine, put it in the cellar for 10 years and forget about it are over,” said Mr Gearing. “More analytics now allow you to trade.”

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Pimco’s Ivascyn warns of inflationary pressure from rising rents




US Inflation updates

A leading US bond manager has warned of inflationary pressure from housing rental costs that could push interest rates higher and overturn a sense of complacency among investors.

The comments by Dan Ivascyn, chief investment officer at Pimco, which has $2.2tn under management, comes after US 10-year interest rates eased in recent months to about 1.25 per cent. Fears of an inflation surge sparked alarm among bond investors at the start of the year and pushed the important benchmark to a peak of 1.75 per cent by the end of March.

“There is a lot of uncertainty on inflation and while our base case is that it proves transitory, we are watching the relationship between home prices and rents,” Ivascyn told the Financial Times. “There may be more sustained inflation pressure from the rental side.”

Owners’ equivalent rent is a key input used for calculating the US consumer price index. As rents become more expensive, investors could become increasingly concerned about “sticky inflation”, pushing the 10-year Treasury yield back towards 1.75 per cent, said Ivascyn. 

Line chart of US 10-year expected rate of inflation showing long-term bond market inflation expectations loiter near decade peaks

The Federal Reserve said in its latest policy statement last week that it had made “progress” towards its goals of full employment and 2 per cent average inflation. Jay Powell, the Fed’s chair, said there was more “upside risk” to the inflation outlook, although he expressed confidence in transitory price pressure over time.

The latest measure of core consumer prices, which is followed by the central bank, ran at 3.5 per cent over the 12 months to June, the fastest pace since July 1991.

“There is a lot of noise and uncertainty in the data” and “the Fed has a difficult job deciphering the economic information coming in”, said Ivascyn.

The fund manager said the potential for much higher bond yields is probably capped by the prospect of the central bank tightening policy in the event of inflation expectations breaking higher.

Bar chart of assets under management ($bn) showing Pimco Income ranks as the largest actively managed bond fund

“We do believe if the Fed sees inflation expectations rise out of their comfort zone, that they will probably act,” said Ivascyn. “That has been the message from Powell’s last two press conferences.”

Pimco expects the central bank will announce a tapering of its current $120bn monthly bond purchases later this year, with a view to starting the process in January. While the policy shift is being “well telegraphed” and data dependent, Ivascyn said higher bond yields and more market volatility were likely.

“This is a tough market environment and it is a time when you want to be careful,” he said, adding that Pimco had been reducing its exposure to interest rate risk as the bond market had pulled borrowing costs lower. 

“Valuations are stretched and it makes sense to adjust our portfolios.”

Ivascyn oversees the world’s largest actively managed bond fund, according to Morningstar. The $140bn Pimco Income Fund co-managed with Alfred Murata, has a total return of 2 per cent this year, versus a slight decline in the Bloomberg Barclays US Aggregate index. Over the past year, the fund has extended its long record of beating its benchmark, according to Morningstar.

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Wall Street stocks follow European and Asian bourses lower




Equities updates

Wall Street stocks followed European and Asian bourses lower on Friday after markets were buffeted this week by jitters over slowing global growth and Beijing’s regulatory crackdown on tech businesses.

The S&P 500 closed down 0.5 per cent, although the blue-chip index still notched its sixth consecutive month of gains, boosted by strong corporate earnings and record-low interest rates.

The tech-focused Nasdaq Composite slid 0.7 per cent, after the quarterly results of online bellwether Amazon missed analysts’ forecasts. The tech conglomerate’s stock finished the day 7.6 per cent lower, its biggest one-day drop since May 2020.

According to Scott Ruesterholz, portfolio manager at Insight Investment, companies which saw significant growth during the pandemic may see shifts in revenue as consumers move away from online to in-person services.

“[Consumers are] going to start spending more on services, and so those businesses and industries which have benefited in the last year, companies like Amazon, will be talking about decelerating sales growth for several quarters,” Ruesterholz said.

The sell-off on Wall Street comes after the continent-wide Stoxx Europe 600 index ended the session 0.5 per cent lower, having hit a high a day earlier, lifted by a bumper crop of upbeat earnings results.

For the second quarter, companies on the Stoxx 600 have reported earnings per share growth of 159 per cent year on year, according to Citigroup. Those on the S&P 500 have increased profits by 97 per cent.

But “this is likely the top”, said Arun Sai, senior multi-asset strategist at Pictet, referring to the pace of earnings increases after economic activity rebounded from the pandemic-triggered contractions last year. Financial markets, he said, “have formed a narrative of peak economic growth and peak momentum”.

Column chart of S&P 500 index, monthly % change showing Wall Street stocks rise for six consecutive months

Data released on Thursday showed the US economy grew at a weaker than expected annualised rate of 6.5 per cent in the three months to June, as labour shortages and supply chain disruptions caused by coronavirus persisted.

Meanwhile, China’s regulatory assault on large tech businesses has sparked fears of a broader crackdown on privately owned companies.

“It underlines the leadership’s ambivalence towards markets,” said Julian Evans-Pritchard of Capital Economics. “We think this will take a toll on economic growth over the medium term.”

Hong Kong’s Hang Seng index closed 1.4 per cent down on Friday, while mainland China’s CSI 300 dropped 0.8 per cent, after precipitous slides earlier in the week moderated.

Japan’s Topix closed 1.4 per cent lower, after the daily tally of Covid cases in Tokyo surpassed 3,000 for three consecutive days. South Korea’s Kospi 200 dropped 1.2 per cent.

The more cautious investor mood on Friday spurred a modest rally in safe haven assets such as US government debt, which took the yield on the 10-year Treasury, which moves inversely to its price, down 0.04 percentage points to 1.23 per cent.

The Federal Reserve, which has bought about $120bn of bonds each month throughout the pandemic to pin down borrowing costs for households and businesses, said this week that the economy was making “progress” but it remained too early to tighten monetary policy.

“Tapering [of the bond purchases] could be delayed, which in many ways is not bad news for the market,” said Anthony Collard, head of investments for the UK and Ireland at JPMorgan Private Bank.

The dollar, also considered a haven in times of stress, climbed 0.3 per cent against a basket of leading currencies.

Brent crude, the global oil benchmark, rose 0.4 per cent to $76.33 a barrel.

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday

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US regulators launch crackdown on Chinese listings




US financial regulation updates

China-based companies will have to disclose more about their structure and contacts with the Chinese government before listing in the US, the Securities and Exchange Commission said on Friday.

Gary Gensler, the chair of the US corporate and markets regulator, has asked staff to ensure greater transparency from Chinese companies following the controversy surrounding the public offering by the Chinese ride-hailing group Didi Chuxing.

“I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” Gensler said in a statement.

He added: “I believe these changes will enhance the overall quality of disclosure in registration statements of offshore issuers that have affiliations with China-based operating companies.”

The SEC’s new rules were triggered by Beijing’s announcement earlier this month that it would tighten restrictions on overseas listings, including stricter rules on what happens to the data held by those companies.

The Chinese internet regulator specifically accused Didi, which had raised $4bn with a New York flotation just days earlier, of violating personal data laws, and ordered for its app to be removed from the Chinese app store.

Beijing’s crackdown spooked US investors, sending the company’s shares tumbling almost 50 per cent in recent weeks. They have rallied slightly in the past week, however, jumping 15 per cent in the past two days based on reports that the company is considering going private again just weeks after listing.

The controversy has prompted questions over whether Didi had told investors enough either about the regulatory risks it faced in China, and specifically about its frequent contacts with Chinese regulators in the run-up to the New York offering.

Several US law firms have now filed class action lawsuits against the company on behalf of shareholders, while two members of the Senate banking committee have called for the SEC to investigate the company.

The SEC has not said whether it is undertaking an investigation or intends to do so. However, its new rules unveiled on Friday would require companies to be clearer about the way in which their offerings are structured. Many China-based companies, including Didi, avoid Chinese restrictions on foreign listings by selling their shares via an offshore shell company.

Gensler said on Friday such companies should clearly distinguish what the shell company does from what the China-based operating company does, as well as the exact financial relationship between the two.

“I worry that average investors may not realise that they hold stock in a shell company rather than a China-based operating company,” he said.

He added that companies should say whether they had received or were denied permission from Chinese authorities to list in the US, including whether any initial approval had then be rescinded.

And they will also have to spell out that they could be delisted if they do not allow the US Public Companies Accounting Oversight Board to inspect their accountants three years after listing.

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