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WHISKY JOURNAL

WHISKY JOURNAL

Faking the ageing process: can technology threaten the whisky market?

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Faking the ageing process: can technology threaten the whisky market?

The recent downturn in tech stocks, which followed an unprecedented surge at the beginning of the year, has started a rash of comparisons between the current state of the market and the height of the dot-com bubble in 2000.

Many market experts are pointing to the current investor euphoria as the genesis of the problem which has caused the number of over-the-counter shares traded since last February to rocket to 280 million shares in November and 1.15 trillion shares in December. While many investors are throwing their hearts and life savings into the stock market, global trade is declining, global growth is slowing, and birth rates are dropping. Where investment doesn’t match growth, bubbles are formed and then burst.

In this article, we’ll be looking at the likelihood of a stock market crash and how commodities could represent a safe haven for savvy investors.

It is the cask market that has really demonstrated resilience during these times of global economic uncertainty and at VCL we feel it is the cask market that will go on to outperform and break records

Tim Ashley, VCL Founder & Partner

The US Tech Bubble

Currently, the tech market in the United States is more than bullish. Companies such as Tesla, Doordash, and Airbnb have seen meteoric rises in their share prices. 

However, a recent Deutsche Bank survey of 627 market professionals found that 89 per cent of investors thought that U.S. tech shares were in bubble territory. Tesla, in particular, is an excellent example of this volatility. The electric car manufacturer’s market cap soared to over $800 billion in the year leading up to January 2021, before dropping to less than $600 billion a month later. 

Overall, the company’s share price increased by over 650 per cent in 2020, leading to CEO Elon Musk announcing that he believed his own company’s stock prices were too high. This rapid growth in stock prices has been reflected across the wider tech-market. The tech-heavy Nasdaq 100 Index of Stock increased by 42 per cent last year whereas the broader S&P 500 Index only gained 15 per cent. This represented the highest average of any year since the formation of the dot-com bubble.

This combination of price volatility, and a distinct similarity of circumstances to the creation of other tech-stock bubbles, has many market experts predicting a crash.

The Dow Jones and S&P at All-Time Highs

For many, the rapid rise in the global market, as indicated by the record highs hit by the S&P 500 and the Dow Jones, is a welcome indicator of recovery after the disruption of the pandemic. However, expert investors have also described the situation as an “epic bubble plagued by overvaluation”. Currently, the S&P 500 is trading at more than 21 times earnings estimates for the next 12 months. It is also predicted to hit the 24 times earnings estimates seen in March 2000. 

If the pullback in tech stocks seen at the beginning of this year is an indication of things to come, the market correction and resulting sell-off could do severe and long-lasting damage.

It is worth noting that the Nasdaq showed similar growth in March 2000, surging from 2000 to the 5,000 level before the dot-com bubble burst. It took nearly 15 years for the Nasdaq to recover its value.

Inflation and Low-Interest Rates

Currently, interest rates in many countries are close to zero.  The US Fed rate is at 0.25%, and the Bank of England base rate is 0.1%. However, the massive economic stimulus packages being rolled out by governments across the world could kickstart a rise in inflation.

In periods of higher inflation investors tend to favour secure companies with consistent earnings that pay reliable dividends. Currently, however, investors are favouring special purpose acquisition companies (SPACs) that have zero track record of earnings. Also known as “blank-check companies,” SPACs have no extant commercial operations. They are established specifically to raise capital from investors for the purpose of acquiring one or more currently operating businesses. 

Companies such as electric car maker Lucid Motors and air taxi service Joby Aviation have raised a combined $6.2 billion from SPACs without ever having sold a product or service. Lucid Motors, which has yet to launch a vehicle, is currently valued at $24 billion and says it expects that annual revenue will rise above $20bn within five years. It took Telsa five years and the launch of the Model S to hit that same revenue.

Despite potential inflation increases on the horizon which make pounds earned in the future worth less than pounds earned today, investors are currently more than willing to pour money into companies with no commercial operations and hugely overinflated valuations.

Low Bond Yields

Currently, bonds that even a couple of years ago were yielding fantastic returns now offer low or even negative returns. For example, some 10-year German bonds are trading at -0.34 per cent, meaning you would lose money by investing in them. This lack of bond yields has led investors to move to more risky investments, such as speculative investments into cryptocurrencies, tech startups, and SPACs. 

Falling bond returns can inflate share prices beyond their reasonable value. Current market leader Tesla has a greater valuation than Facebook, despite Facebook having 30 times more profit. The reduction in bond yields has also resulted in a buoyant cryptocurrency market. Bitcoin, which makes up 75 per cent of the market, currently has a market value of 20-30% higher than Facebook, despite having a value based only upon supply and demand.

With bond yields low, investors are pumping huge amounts of funds into risky markets, such as tech-startups with ridiculous revenue projections and the viciously volatile cryptocurrency market. Rampant speculation in stocks and cryptocurrency is inflating a bubble that could very well burst in the near future in spectacular fashion.

Safeguarding by Investing in Commodities

With the markets bouncing between the lows of the pandemic and the highs of a potential precrash, it can be tempting for investors to simply start storing money under a mattress. However, there are still markets with significant durability that can turn a reliable profit for savvy investors.

The commodities market survived the destructive effect of the pandemic with remarkable stability.  Between January and March 2020, the Liv-ex Fine Wine 100, which tracks the prices of the 100 most expensive wines in the world, fell by just 2.5%. During the same period the FTSE 100 had fallen by 33%, the Dow Jones Industrial Average fell by 19%, and Japan’s Nikkei 225 fell by 27%.

Having weathered the worst of the pandemic’s effects, the Liv-ex Fine Wine 100 actually ended 2020 up by 4.65%. The stability of the commodities market is coupled with the potential for great returns. For example, over the last 15-years, the total return on the Liv-ex 1000 was 234%. According to the Sharpe Ratio, fine wine posted superior risk-adjusted returns to gold over the past 15 years. 

Whisky is another fantastic example of how the commodities market has the potential to both weather challenging financial conditions and turn a profit. The Knight Frank Rare Whisky Index has shown an unparalleled 586% growth over the past decade, ranking it as one of the best performing assets globally.

The Rare Whisky 101’s Apex 1000 index has appreciated by 162.91% since 2014, outperforming gold by 150% and the FTSE by over 160%. While fine wine and whisky are excellent examples of how investment in commodities represents a reliable safe haven during volatile financial times, they are far from the only ones.

According to Knight Frank’s Luxury Investment Index (KFLII), over the past decade, the value of vintage cars has risen by 258 per cent, collectable coins have risen by 193 per cent, stamps by 189 per cent, and fine art by 158 per cent. With the growth of multiple investment bubbles potentially being the heralds of a coming market crash, the stability and high returns of the commodities market will continue to attract intelligent investors.