Scotch: The Perfect Brexit Investment?

Diageo's shares jumped 15% since the Brexit vote. Why...?

WHATEVER the longer-term outcome of the UK's vote to leave the European Union, Brexit hasn't been all bad news for UK investors so far, writes WhiskyInvestDirect CEO (and former Diageo executive) Rupert Patrick.

Diageo Plc (LON:DGE) has the largest market share in Scotch whisky, and is the world's largest premium spirit company. Its shares have not only risen this week, up 15% since the day of the referendum. They have also been upgraded by analysts on the back of the referendum's verdict, mainly due to the benefits it should reap from a lower British Pound.

 
Amid the wider Brexit gloom, this is good news for the company and its shareholders.

Because while all UK export industries might in time welcome the weaker Pound, few dominate their global market quite like Scotch whisky does. And whatever trade deals are now needed or brokered post-Brexit, it's hard to see the world's Scotch whisky fans actively turning away imports of the world's favourite brown spirit.

It bears repeating that nowhere else in the world can make Scotch whisky besides Scotland. Built over the last 150 years, its global brand is protected by UK and – for now – EU law. Yes, other brown spirits are available, such as American bourbon, French Cognac or Japanese whisky. But none comes close to matching the spread, never mind the depth, of Scotch whisky's global sales.

Last year the French drank 40 times as much Scotch as they did Cognac. Mexico now spends nearly as much on Scotch as it does on tequila. Japan's own whisky industry relies on Scottish supplies of new spirit, buying 82% of all Scotch exported younger than 3 years old since 2010.

Scotch export demand today sees three cases (of 12 bottles each) leave Scotland for overseas markets every second. Global sales have grown 1.5% per annum by volume over the last 30 years, and more than twice that fast by value. Demand has deepened as it spreads, with 27 national markets now buying more than half-a-million cases each every year – up from 14 in 1985.

Diageo, it's worth noting, makes less than 25% of its revenue from Scotch. The rest comes from other drinks. But the weaker Pound could prove good news for others involved in the Scotch whisky industry too. Not least, UK investors owning stocks of maturing whisky in the barrel.

In these turbulent, post-vote but pre-Brexit times, tangible assets are back in demand. Gold has proved its reputation, again, as a safe haven in a troubled financial climate. Maturing Scotch whisky offers another physical good that canny investors can consider.

Even before this week's drop in Sterling, industry data for the last decade shows the cash price for 8-year old Scotch whisky – bought new, and sold each year of the decade 2006-2015 – averaging historic returns of 14.5% per annum. That number is net of the trading commission you'd pay on WhiskyInvestDirect. However, you would have paid storage too, bringing the return down to 10.4% pa.

That compares very favourably to deposit rates, but it does involve some risk. Adjusting for inflation your 'real' historic return would have been 7.1% per year on average. Each of these figures was for an equal holding of typical malt and grain whiskies. Mixed together before bottling they make blended whisky, the unsung workhorse of the global Scotch market, accounting for 9 bottles in every 10 sold worldwide.

Since our launch in September last year, WhiskyInvestDirect has sourced over £5 million of spirit that is now improving in the barrel, day by day. That is a tiny percentage of the estimated £15bn of Scotch whisky quietly resting in Scottish warehouses, getting ready to fuel brands such as Johnnie Walker, Bell's, Teacher's, Label 5, Whyte & Mackay and more – and all at prices likely to be higher from their current value in the barrel today.

Unlike any other tangible asset I can think of, new-make Scotch spirit remains untouched by the wall of investors' money desperately seeking a home in tangible assets. Even before Brexit dented the Pound and drove a new move to hard assets, that had already driven prices sharply higher for everything from stamps to classic cars, en primeur wines to prime London property. Whereas with new Scotch spirit, you get to buy at un-inflated prices, using today's sharply devalued Pounds.

As for that choice between buying stock in a company or buying the actual whisky itself? Well, if all hell breaks out, you can't drink your share certificates.