Lessons from wine
The persistently gloomy narrative on the UK equity market seems unjust, given the underlying growth and value opportunities we are finding. So what can the UK’s wine industry teach us in the face of such unrelenting negativity?
Like all regional equity markets, the UK is made up of industries that have a higher sensitivity to shifts in global growth sentiment and sectors that are more dependent on the fortunes of the domestic economy. The hangover from last year’s heightened global growth concerns has now been aggravated by greater political uncertainty and sterling volatility, weighing on both components of the UK market.
UK equity returns have nevertheless been strikingly resilient this year. Despite seeing a greater dispersion in valuations, the prospect of a more benign economic outlook has proved positive for both domestically exposed and international names.
So are these positive recent returns or the overarching negative sentiment the better guide to what lies ahead? The tribulations faced by the UK wine industry offer some clues. Encouragingly, after much perseverance, eccentricity and investment, English winemakers have managed to defy the market odds.
As demonstrated by the premium Champagne houses through the eighteenth century, the art of storytelling is a key weapon in any business arsenal. While the British may have been the first to invent sparkling wine, the French majestically crafted its myth and legend. They benefitted as Champagne’s prestige and market lure appreciated, driven by their ability to monetise its value through investment, brand and the scaling of growth.
Yet in recent history, we’ve witnessed a significant improvement in the credentials of English winemaking. During the past decade, there has been effervescent growth in the number of wineries, vineyard plantations and bottles produced.
Changes to viticulture and plantings, investment, warmer temperatures and increased expertise have had a dramatic impact. Wine today is also better built for quality and ageing, largely due to innovation in production and preservation techniques. Meanwhile, there is greater focus on sustainability and terroir – notably in sparkling wine – as younger, more global consumers aspire to taste better products.
English wine is now fizzing thanks to these investments. So often disregarded by the wine community, the UK is now scooping an abundance of international awards. And the 2018 vintage should be unprecedented in terms of both yield and quality. For many, volume production will have doubled on the prior year, which should help meet growing consumer demand from home and abroad. As champagne shipments to the UK continue to fall, this provides a window of opportunity for English winemakers’ reputations to pop.
While I realise I’m looking at this from a ‘glass half full’ perspective, seeing UK winemakers achieve new-found global success offers encouragement for UK equities more broadly. English sparkling wine has rightly achieved world recognition, regularly outscoring global peers in blind tastings. Similarly, the domestic UK equity market is full of best-in-class companies, yet valuations and investor appetite do not match the strong company fundamentals and growth opportunities.
Markets are likely to express caution in the run-up to the first-quarter corporate results, so equity performance may stutter over the coming months. However, we should remind ourselves of the virtues of patience and the subsequent success for winemakers over the long term. Just as it should for equity investors, the combination of perseverance and identifying mispriced growth remains a key determinant of value creation in the UK stock market.