Will Bank of England rate cut impact market upward trend?

The Bank of England’s recent interest rate cut, the first since March 2009, taking the level to a new record low of 0.25%, has been undertaken in the hope of stimulating the economy and helping to cure post Brexit blues.

Alongside the headline cut in the interest rate are a number of other measures designed to provide stimulus to the economy, the Bank of England will:

  • Purchase £10bn in corporate bonds
  • Buy an extra £60bn of government bonds extending the ongoing programme of quantitative easing
  • Provide up to £100bn of new funding to banks on the condition they pass on the cut in rates to borrowers and increase lending

Economist John Maynard Keynes is likely turning in his grave, not for the first time in the last few years, as another opportunity to stimulate the economy via infrastructure spending is passed up.  Nevertheless this is likely to be good news for those already invested in wine.

The rate cut may well see more investors seeking growth through fine wine, particularly when Liv-ex continues to report strong performance versus equities, as can be seen in the table:

Index Level (31/07) MOM growth (%) YTD growth (%) 1 yr growth (%)
Liv-ex Fine Wine 50 308 5.4 16.2 14.7
Liv-ex Fine Wine 100 269 3.6 12.9 11.5
Liv-ex Fine Wine 500 269 3.8 12.8 12.8
Liv-ex Fine Wine 1000 273 3.4 11.5 11.2
Liv-ex Investable 296 4.5 13.8 12.9
FTSE 100 6,724 3.4 7.7 0.4
S&P 500 2,174 3.6 6.4 3.3
Gold 1,017 2.1 41.4 45.3

Source: Liv-ex August 2016

The data reported is measured to the end of July 2016. Gold, the traditional safe haven asset of global choice has predictably seen a rally through 2016 in response to the pre and post Brexit referendum uncertainty and political issues in the Middle East and elsewhere. Meanwhile, the fine wine equivalent to the Stock Exchange (Liv-ex) reports that the total value of firm bids and offers on the market has reached a new level of £36.8million and the number of active markets has also achieved a new record of 6,737 in July.

All of the major Liv-ex indices continued to grow throughout July with the Liv-ex 50, (measures the daily movement of the last ten physical vintages of the five First Growths), up 5.4% in the month. A number of wines reached record highs and whilst big Bordeaux brands enjoyed great growth and market share also shifted slightly seeing some increased trading in the wines of Burgundy, Champagne, Italy and the Rhone. The regions collectively classified by Liv-ex as “Others” (Spain, California, Australia) increased market share at 8.2% of trade by value led by activity in Australia’s Penfolds Grange in the month.

This broad upward movement across sectors reflects the strength and diversification the market now enjoys.

The Bank of England’s slightly unimaginative approach to economic stimulus will certainly help those with large mortgages, likely have an inflationary impact on the values of assets, such as fine wine, and contribute to prolonging the current bubble in corporate debt, but as has been widely pointed out, may do little to stimulate the economy.  Fine wine looks likely to be one of the beneficiaries of current market conditions but as always price is critical to investors and currency a factor. For further information contact us now on 0203 384 2262.