Whisky Is Becoming Cheaper

Turnarounds?

Last week we had a visitor from London. The London clerk of our bank briefed us on the current situation regarding Brexit. Our media reports a lot about the current difficult situation of the British. You can't believe everything that's being written - at least I can't. What's true? What's the result of lobbying? And by which side? And which information has been distributed for political reasons? The fight for the best positions after Brexit is on.

Banks work best in a stable economic system, which we currently don't have. The Brexit vote took place on June 23, 2016. First nothing changed for most companies, including whisky producers. But strategic decisions were postponed (how many - and by whom - is unclear). All reliable economic data is currently based on the official statistics of the first half of 2016, which ended already one week after the Brexit vote. It’s not clear how the economy of the UK and its trade partners has developed since. It's subject to interpretations, wishful thinking and prophecies of doom. The awakening will come sometime in October when the numbers for the third quarter are available. What we have already seen is a significant devaluation of the pound by more than 10%.

Another deadlock will also be resolved in November. The vicious fight for the White House will be decided on election day, November 8. Will the USA experience a shakeup of power similar to that of the British with their Brexit? Uncertainty all around us.

Finally, the world is waiting for the decision of the Federal Reserve to raise the key interest rate by at least 0.25%, ending the era of zero-rate policy. This end will have a bigger impact on whisky than Brexit and US election combined. Higher interest rates basically mean four things: Saving slowly starts to be worthwhile again, and the leeway for countries to unconditionally amass debt is becoming smaller. On the other hand, banks can start to hope for profit from interest-rate deals again, and eventually the current stock market bubble will be deflated.


Whichever way you look at it - all indicators point to a turnaround of the trend or even several turnarounds.

The pound has already reacted with a significant devaluation against the euro. But for three months the pound has been going up and down in a corridor against the euro. Finally it dropped for another 5% in October. It seems like the market is not sure whether Brexit might actually be good for Britain in the end.

The pricing of whisky has been double-faced. Since a major part of Scotch whisky reaches consumers in the euro zone via distributors, most currency gains have been reaped by the distributors up to now. But there are several exceptions. The prices of several dozens of whiskies have been reduced with European retailers, confirming that exporting is easier with a weak pound.

Whether others can and will follow suit remains uncertain since in the wake of currency depreciation, inflation in a country often rises due to rising import prices. And when cost prices grow in the UK, export prices must also be raised again.

As I have stated in my July newsletter on Brexit, the British trade balance with Continental Europe is massively negative. Britain imports much more goods from Europe than we can compensate for with buying whisky and spending holidays there. You often hear about future trade restrictions and customs duties for Britain when the media reports on the upcoming Brexit negotiations. That is of course political, if not populist, nonsense. As a response to EC customs duties, the British would also levy duties, which, due to the negative trade balance, would do us even more harm than the British. Take the German automotive industry as an example. One in seven cars produced in Germany is sold to Britain.

I don't think whisky prices will change much more after Brexit than they have already done. However, the slowly weakening economy will probably reduce the overall demand for luxury goods a bit. That should at least partially reduce the strain on whisky stocks, and the trend to more whiskies with no age statement should be diminished.

If there are any large shocks in world economy due to the US election or interest rate increase, it will have a massive impact on the available income in Continental Europe. After all, we're in this together. And just like in the last financial crisis in 2008, people will restrain their consumption. The impact on whisky back then was surprisingly small in hindsight. Just like after the burst of the dotcom bubble after September 11, 2001, people saved on eating out and on durable goods, but they didn't want to do without their dram of whisky in the evening. That's easy to understand. After all, for the price of one visit to a restaurant you can buy whisky that lasts for several weeks.


Horst Luening, October 2016