China is the biggest market for red wine in the world and last year Chinese wine drinkers consumed 1.86 billion bottles of red.
As luck would have it, Australia’s Treasury Wine Estates is the second largest publicly traded wine maker in the world with a market capitalisation of nearly $3.5 billion.
China looked like it would continue to be Treasury Wine Estates’ fastest growing market until Chinese president, Xi Jingping announced a crackdown on corruption last year.
What followed was a big slowdown in the restaurant and luxury goods trade; it’s worth mentioning wine is used to grease the wheels of business deals in China.
Come January this year, Treasury downgraded its earnings guidance, noting the crackdown in China had started to hurt sales volumes.
In response, Treasury’s shareprice was hit hard, falling 20% in a day.
Treasury wasn’t alone in taking a hit, in April, French drinks maker Rémy Cointreau announced cognac sales had fallen over 30% after China started its anti-corruption campaign.
As with salary packaging company McMillan Shakespeare last year, the pain felt by Treasury Wine Estates shareholders is known as idiosyncratic risk.
Idiosyncratic risk is as risk specific to a particular company or industry sector.
While the whole market won’t be impacted by a crackdown on corruption in China, inevitably some companies who’ve increased revenues (through no fault of their own) based on that corruption are going to feel the fallout.
The best way to avoid idiosyncratic risk? As always it’s our old friend diversification.
If you’re holding five managed or exchanged traded funds within your portfolio and one of them was based on the ASX 200, you’d be exposed to Treasury Wines as it forms part of the ASX 200.
However, on the day Treasury Wines fell 20%, the ASX 200 lost 0.4%, so the impact on your portfolio would have been negligible.
Now imagine that 20% fall within a portfolio of five shares – not so negligible.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances
