Opportunity beckons in developing world

This article is part of
Wine Investing - December 2013

The Global Wine Shortage theory recently highlighted in a report from Morgan Stanley is underpinned by the threefold effect of relatively poor harvests, less land being under vine and increased demand for wines in China and other emerging markets.

There have already been several industry rebuttals of the report, suggesting that even if there has been a shortage of production in recent years, 2013 heralds an improvement in supply.

However the headline “Global wine shortage” has caught the imagination of journalists and industry bodies alike. Those three words encapsulate the story and its spread around the internet is based on people’s fascination with the concept.

Article continues after advert

In spite of the gainsayers, if scarcity of a product leads to higher prices (it does) and decision-making is based on behaviour you can’t analyse accurately most of the time (it is), then it is possible there will be small increases in the prices of all wines in some measure of response.

Investors in fine wine may be wondering about the potential benefit for their investments. Will any shortage of cheap bulk wines on the global wholesale market have any impact on prices of fine wine over the coming years?

Let us consider the effect of lower harvests on fine wines first of all. You may think that less fruit means fewer bottles of wine, which leads to scarcity of product and therefore increased prices, however this is not how it works in the fine wine market.

Small harvests are likely to be the effect of poor growing conditions and in many cases this actually means less wine and reduced quality. A classic example is 2002 on the left bank of Bordeaux, when many chateaux produced 50 per cent to 75 per cent of their average and the vintage is considered one of the weakest of the century.

The strict appellation controls mean that grapes cannot be bought from outside the chateau, so the winemakers have to make do with what they have got. So, in cases where bad harvests do occur, the very rules that safeguard the reputation and standing of particular producers can also prevent them from remedying the situation.

Those same rules render the “land under vine” threat irrelevant in the case of fine wines.

However, the final point – increasing demand in China and elsewhere – is very salient when discussing fine wine price movements. The past decade has been shaped by the impact of China’s emergence as a global powerhouse, and future demand from India, Brazil and Russia is likely to further bolster prices. It is from here that the opportunity really beckons for the fine wine investor.

As developing economies grow, so do individual aspirations, and so does expenditure on luxury products.

Evidence over the past few years suggests that prices will rise due to demand from countries such as these and investors may see decisions taken now pay handsome dividends in years to come.

Philip Staveley is director at Amphora Portfolio Management