Bloodstock during economic decline
There is little doubt that Coronavirus will cause a global recession as fund managers and economists desperately try to forecast when markets will reach a bottom line.
This month we have witnessed global equities enter a bear market in the space of just 21 days. This is the fastest this has ever happened in the past century. Furthermore, the CBOE Volatility VIX index - also known as the ‘fear gauge’ - has soared. As of 26th March, it was registering at 58.06, having reached an all-time high of 82.69 on 16th March. Since the index was launched in 1990, it has averaged a reading of just 19.
It is at times like these that the benefits of a well-diversified portfolio become all too clear. Being invested across a range of asset classes can help to protect investors against some of the downside. It was once thought that a portfolio of bonds and equities would be sufficient to diversify portfolios. But, as investors have become more sophisticated, new asset classes have been added. Today most investors recognise that the behaviour of equities and bonds are interlinked.
Thankfully, one of bloodstock’s biggest benefits is that, as an asset class, it is not at all correlated with the broader equity and fixed income markets, so it acts as a valuable diversifier. It is also a more flexible investment than one might think. There is always the option to retain a yearling to sell in a breeze-up sale next spring or as a Horse-in-Training.
Bloodstock investing is, of course, a higher-risk endeavour than investing in some mainstream asset classes. But these recent market behaviours show that all types of investment carry risk.
Historical clues to future performance
Common sense tells us that everyone is going to take a hit this year, in every corner of every market. Furthermore, we are in uncharted waters. Economic decline generally follows a financial boom. Here, we have a crisis caused solely by a global health pandemic. However, there may be some light at the end of the tunnel.
If we look at the performance of the bloodstock market in the past 15 years, we see that, in fact, the price of top end yearlings stayed consistent throughout 2007, 2008 and 2009, with Tattersalls Book 1 prices only falling by 10.95% in this period and the median by just 2.5%. This was able to happen due to increased polarisation, where the top end of the market held strong but the middle almost completely fell away. The big players of the game could still afford the horses they wanted.
However, it is important to note that traders did not fare so well in these years. In 2007, the average price of foals increased significantly (+ £5,062), leading to the lowest profit margin (before all costs) of recent years (+ 37.33% vs average of + 68.27% in past 15 years).
What is most staggering to see in this data though is the speed at which the market recovered. In 2009, over 122 yearlings were sold for over £100,000 (vs just 91 in 2008) and the average price was £43,301 (higher than it was was before the crisis).
Furthermore, the foal price had gone way back down and traders were making money again. The profit margin soared back up to + 66.98%.
No one can say what the future holds but, if history repeats itself, we are probably facing a gruelling autumn of yearling sales but cheap foals are on the horizon which can be resold to returning, competitive racehorse owners in 2021. This year may just be the year to invest and be part of the rebound!
Data courtesy of Arion Pedigrees Ltd. and Tattersalls Ltd.