Fine Wine Monitor – Brown Backtracks

The fine wine market adjusts to the U-turn on Sipps, while the Bordeaux 2005 vintage looks set to be exceptional

Activity in November was robust with the exchange notching up its second strongest month of the year after September. Exchange turnover was up 18.5% on October and 40% year
on year. Stock held by the leading UK merchants dropped 1.4% for the month after last month’s inventory build-up in preparation for Christmas. The Liv-ex 100 gained a further 1.7%, driven by top Bordeaux names, but also an up-tick in DRCs.

The main talking point in the market in recent weeks has revolved around the UK chancellor’s remarkable U-turn on Sipps in his pre-budget speech. There is no doubt that Sipps has been a major contributor to a surge in fine wine prices in recent months as traders and private collectors positioned themselves for the change. Indeed, year to date the Liv-ex 100 Fine Wine Index is up 17.9%, of which much of the movement has come since late summer. The obvious conclusion, therefore, is that there is now going to be a wholesale sell-off. Our suspicion, however, is that this is too simplistic.

While the UK remains a very important market for top claret, demand from new markets like Russia and China, which have created dozens of new billionaires in the last five years, have also been significant, as has a general improvement in the global economy. Indeed, fine wine is a classic late-cycle play and improving conditions across Europe, Asia and the US have provided considerable support. A bumper season for City bonuses is also unlikely to do any harm.

There will, no doubt, be a pull-back in some wines but, after a welcome pause for breath, the market looks set to move higher again. If there is to be some weakness, it will likely to be in the 1996s, which have moved furthest fastest and are also fairly readily available. The top wines from the Eighties and 1990, however, are still well bid and we have seen no softening in demand. In fact since the U-turn we have auctioned a rare case of Pétrus 1990 magnums for £15,800 – up 50% on March – and a record price for the wine on Liv-ex.

Of course, occasional profits from trading fine wine have always been immune to capital gains taxes anyway. Moreover, the Sipps debacle has given fine wine investment both a huge amount of publicity and no small amount of legitimacy. We know of several new professionally managed funds, for example, that are due to tap this market in the next year or so, bringing new long-term money into the market.

This process will no doubt be helped further by a new book, Wine Investment for Portfolio Diversification by Mahesh Kumar, which is possibly the most thorough piece of academic analysis on investing in fine wine ever attempted. The author has constructed an index of 50 wines, made up of the best Bordeaux names. He has then observed and contrasted the performance of his index over rolling 5, 10 and 20-year periods against the FTSE 100 and UK bonds. His conclusion is that fine wine not only produces comparable returns to equities, but that low volatility and an even lower correlation to the performance of traditional assets makes it a fantastic diversification tool. Watch this space.

And then of course there is Bordeaux 2005, which looks set to be a very good or even exceptional vintage. This will bring additional fanfare and more new money, providing the global economy stays on the rails. The right approach would seem to be to buy into weakness; the problem with this strategy at the moment is that we are not seeing much weakness! db January 2006