Dark grey Tuesday

At the close of trading in Europe yesterday the MSCI world index was down 18% from its highs in May last year, perilously close to an official bear market.  With Chinese markets still to return from their New Year break, trading on mainstream markets has been difficult. Although not on the scale of a Black Monday (global equities collapse of 1987), Black Tuesday (the start of the Depression), Black Wednesday (UK exiting the ERM in 1992) or Black Thursday (the height of the 1873 panic), it’s certainly been a dark grey day.

Equities markets are having a pretty rough time of things at the moment; between Brent Crude and WTI prices hurting Oil companies, low prices for steel, iron and copper damaging other resource firms and now another series of panics about European banks, headwinds are most certainly tough. 

Should you be worried?

Normally we at Vin-X would (without giving any advice) say that assuming you’re investing for the long term, short term fluctuations in equities prices might not be a concern.  Even a full on stock market crash isn’t necessarily a sell signal.  There is clear evidence to show that an overly “safety first” approach to your investments can cripple your returns in the long run.

Since the dot com boom a significant proportion of investors’ gains have come not from movements in stock prices, but rather from dividends.  In fact this trend has a much longer history than just that: since 1900 two thirds of gains from investments in the US stock market have come from dividends; while this figure is lower today (share buybacks being an increasingly common way to return value to investors) a consistent 40% of gains have come from dividends in the last 30 years.  Unfortunately a couple of articles in “The Economist” over the last few weeks point to these being in danger.

The Economist points out that dividend cover (the ratio of earnings/share vs dividends/share) is lower on the FTSE100 than it has been at any point for the last 15 years, and suggests that further cuts in dividends may be on the horizon. 

Furthermore they sound alarms at the concentration of dividend income from a few sectors: many of the major tech companies don’t pay a dividend at all, banking shares have seen their dividends drop or disappear entirely since 2008 and it certainly seems sensible to expect the dividends from miners and oil companies to fall in the current climate.  While BP and Royal Dutch Shell have managed to maintain their dividend amid significant losses this has been done by increasing debt levels and is ultimately not sustainable long term.  Investors reliant on dividend income are now heavily dependent on pharma and healthcare companies.

As specialists on investment in fine wine, we cannot and will not give advice on these markets, but we can point out that while we think everyone should have some wine in their portfolio it might be of particular interest if you’re concerned about falling equities, the strength of the dollar, Brexit or a forthcoming recession. 


Liv-ex.com: 4th February

The wine market is up 3.5% since mid-November 2015 and has been stable for the last 18 months.  Furthermore, the last three major UK recessions have had very little impact on wine prices.  Something for investors to drink think about. For more information on how fine wine can strengthen your portfolio contact us on 0203 384 2261, via info@vin-x.com