Wine Investing - December 2013
The past two years has seen the fine wine industry come under pressure, with difficult market conditions leaving investors with a bad aftertaste.
From its high in June 2011 at 365 points, the Liv-ex Fine Wine 100 index has fallen dramatically, sitting at 265 points as at the end of October (latest data available from Liv-ex).
According to recent analysis of the key past and current influences on fine wine prices, four factors come to light: the internationalisation of fine wine consumption; the rise of investment as a force in the market; the impact of the information revolution; and the effects of external economic forces.
Chris Smith, analyst at The Wine Investment Fund and author of the report, explains: “These market developments must be set against the economic backdrop. Here, there is a divergence between the west – which is showing some signs of the beginnings of a recovery – and China and some other Asian countries, where growth is slowing down. It is only the rate of growth that is slowing, however, in China. Growth itself is still very high by western standards at around 7.5 per cent – easily enough to generate increasing demand for fine wine.”
He adds that the one common factor across the globe is the effort to reflate economies through loose monetary policies. “This is expected to eventually lead to inflation, as [in the absence of economic growth] a higher amount of money in the economy is divided between a similar stock of goods and services. Like gold, wine is a physical asset that is immune to inflation and its value cannot be eroded by the actions of governments. It is, therefore, likely to attract attention when inflation fears rise, including attracting new investors to the sector.”
But further analysis conducted by the Association of American Wine Economists, comparing the fine wine sector to the FTSE 100 shows that since 1988, using data from a total of 249 monthly five-year periods (for example, January 1988 to January 1993), fine wines have experienced one period of negative returns while the FTSE 100 has had 75.
Nick Martin, founder of Wine Owners, an online tool for managing, analysing and valuing fine wine portfolios, explains: “Collectible assets such as wine have been seen as volatile, but when compared with the FTSE it doesn’t seem that volatile after all. This realisation has caused many to rethink their definition of volatility.”
According to Mr Martin, the fine wine market experienced a steep, rapid price rise between 2009 and the summer of 2011, mainly driven by increasing demand from China and a number of top Bordeaux wines such as Petrus and Le Pin.
Mr Martin says: “2009 was the first very great vintage since 2005 and 2010’s vintage arguably, when we look back in 10-15 years, would be labelled as the best of the two. Some of those price escalations were very dramatic indeed, driven by insatiable demand out of China,” he adds. “The market popped around the middle of 2011 and has been falling ever since.”
Unfortunately, 2013’s vintage, according to Mr Martin, is the worst since 2001 and will have considerable impact on the market as a whole.
Andrew della Casa, founding director of The Wine Investment Fund, agrees: “Reports that the Bordeaux 2013 harvest may be a small vintage of generally low quality means it is unlikely to provide a direct boost to the market when released en primeur next year. With weak sales of all vintages from 2010 onwards, we may be heading towards a supply squeeze on higher quality years.”
However, while Bordeaux may have forced prices down, experienced investors have been looking outside the region for alternatives and have turned to Burgundy, California and, to an extent, Champagne.
“Northern Italy has benefited from the desire to diversify, as have California wines. Another area was Champagne, driven by a number of good vintages, although that market has dipped now,” Mr Martin explains.
Mr della Casa comments: “The market has been oversold and it is now well below trend and appears to be in recovery mode.
“Given that the supply/demand fundamentals remain unchanged and continue to drive the long-run growth rate of wine prices of circa 10-12 per cent a year, now may prove to be as good a time to enter the market as we have seen in the past three years.”
Jenny Lowe is features editor at Investment Adviser
LIV-EX FINE WINE 100
HOW THE INDEX IS CALCULATED
In order to qualify for the index, wines must have attracted critical acclaim from a leading critic (a 95-point score or above) and attract a regular market on Liv-ex. They must also be physically available in the UK market, so recent vintages that are only trading on an en primeur basis are ineligible. The wines included in the index are reviewed on a quarterly basis by committee.
The Liv-ex 100 is calculated using the Liv-ex Mid Price for each component wine. The Mid Price is the most robust measure for pricing wines available in the market and is calculated by finding the mid point between the current highest bid price and lowest offer price on the Liv-ex trading platform. Each price is then verified by our valuation committee to ensure that the number is robust after taking into account all data at our disposal, including merchant offer prices and historical Liv-ex transaction prices.
The Liv-ex Mid Price for each wine is then multiplied by the wine’s average production level – such as 20,000 nine litre cases – with this figure gradually reduced as the wine ages. When the wine reaches 25 years from vintage it is removed from the index as available volumes are too low to attract a strong secondary market.
IN THIS REPORT
Where in the world should investors be looking for top quality wines?
Growing demand from emerging markets and recent poor harvests places wine industry under pressure.
Demand rather than supply remains the key for fine wine investors.
Wine will never be a core holding, but as a diversifying asset, it has good credentials.