BUSINESS FINE WINE: A very good year

Driven by wealth creation and greater transparency, the fine wine market has just enjoyed its best year for a decade

November continued in the same vein as October with a combination of Christmas-related trade and investment buying leading the activity. Exchange turnover was up 40% year on year. Stock held by leading merchants was up fractionally by 1.7%. Meanwhile, the Liv-ex 100 set a new all-time high with a 1.7% rise for the month, leaving the 12-month gain at 46.8%.

The last 12 months has been the best year for the fine wine market in a decade. Our benchmark Liv-ex 100 Index is up 45.7% to the end of November and the broader Liv-ex 500 is up 27.5%. As the table (below) shows, fine wine has put in a strong performance relative to all major assets in 2006; only nickel (+149%) and zinc (+127%) have produced materially better returns.

While a great vintage in 2005 across France has contributed to rising prices, the two main themes driving demand have been wealth creation and improving transparency. The former has affected the discretionary spending of the rich and the second has brought new money into the market. As fine wine tends to be fairly static on the supply side, this increased level of demand has driven prices higher. As both themes appear to be in their infancy, the outlook, barring some kind of financial shock, remains favourable.

Indeed, fine wine is basically a warrant on wealth creation and in the last three years an unprecedented amount of it has been created. According to Forbes there are 793 billionaires in the world today, compared to 476 in 2003. This period of rising prices has come despite the weakness of the dollar, which has sidelined the US market. There has been lots of talk about new markets in Russia, India and China, but the main driver of prices has undoubtedly been the UK. This mirrors the success of the City of London over the last five years, where some US banks are reputably making more money than in their home market.

The other powerful dynamic at play is transparency, for which the internet has been the driver of change. Traditionally fine wine has been an extremely opaque market, which has made it difficult to make a compelling case for investment and, unfortunately, a popular hunting ground for charlatans. The fact that the Liv-ex 100 Index is now listed on Bloomberg is testament to how far perceptions towards fine wine as an asset class have changed and few today would argue that the market lacks transparency. This has brought substantial new flows of capital into the sector, not least from the wine funds.

It appears that both these trends are at a relatively early stage. First, with less than £50m invested in wine funds to date, it is difficult to argue that this trend has run its course and funds flowing from this source are likely to continue to support prices next year. Second, given the amount of wealth created over the last few years, fine wine prices do not look overcooked. Indeed, they are arguably only playing catch-up after a tricky patch for prices in the early part of this century. It is interesting to note in the 10 years between 1996 and 2006, wine prices were mostly pretty flat. Margaux 1990, for example, a 100-point wine, peaked at £3,500 in late 1997, a price it did not convincingly breach until the middle of 2005. On the whole, wine prices have done little better than inflation, which doesn’t appear to suggest that we are in bubble territory yet.

© db January2007