BUSINESS: Fine Wine – September 2007

No shortage of investors – The current financial turmoil looks set to have some impact on fine wine prices, but the market remains healthy

As a result of the long-winded campaign this year, July proved to be a bigger month for en primeur than June on the exchange. Just as some in the trade were off on their summer holidays, out came the First Growths. Turnover on the exchange was up 87% year-on-year; the Liv-ex 100 was up 1.8%. It is up 45% year to date.

As merchants return from their summer break, everyone will be wondering whether “sub-prime” contagion is going to spread to the wine market. The fact that fine wine is not closely correlated to either stocks or bonds, or other mainstream assets, is fairly well documented – most recently in the book Wine Investment for Portfolio Diversification, by Mahesh Kumar – but fine wine is not immune to dislocation in financial markets. The last bull market in wine was brought down by the Asian financial crisis of 1997/8 and those highs were only recovered in 2005.

Fine wine is most closely correlated to the prosperity of the world’s wealthiest consumers. The chart (top right) compares the number of billionaires in the world (as calculated by Forbes magazine) to changes in the Liv-ex 100 Index. As the chart shows, membership of the “billionaire club” has expanded from 243 to 946 since 2002. Over the same period, the Liv-ex 100 Index is up by more than 150%. Most of this increase has been since the middle of 2005, which corresponds with a marked increase in wealth as measured by the Forbes billionaire survey.

In this respect, one must assume that there will be some impact on wine prices from the current financial turmoil. Near term, there will certainly be a reappraisal of risk and if not actually a sell-off, then a consolidation of prices. This must be healthy. Fine wine has been a one-way bet for too long. Some merchants might want to reduce stocks, particularly as invoices for their unsold 2006 purchases come due. Some private collectors and even châteaux owners might also see it as an opportune time to take some profits. On a wine-specific basis, 100-point First Growths look a little frothy, particularly Lafite and Ausone. Lafite 2003 has gone from £1,955 to £7,000 per case over the past two years and Ausone 2003 from £3,400 to £14,000 – increases of 258% and 311% respectively.

Increased potential
Those expecting a rout, however, are likely to be disappointed. The long-term structural bull case for wine is little changed. The failure of socialism/communism and the subsequent re-emergence of the so-called BRIC (Brazil, Russia, India and China) economies have hugely increased the potential and actual market for fine wine. Unlike Louis Vuitton handbags, supply cannot be increased to meet the new demand. In fact, the current fashion for making more concentrated wines in Bordeaux, has led to smaller productions of the top wines in the past five years.Another major structural shift is transparency. The internet has shone a huge amount of light on this traditionally opaque market. Websites like liv-ex.com have made it much easier to measure the performance of fine wine, which has given it considerable credibility as an asset class. This has been reinforced by research that has demonstrated that over the long term fine wine has not only produced comparable returns to equities, but is also uncorrelated, making a strong case for holding some wine in a balanced portfolio. These arguments have attracted a lot of new long-term money from individual and professional investors, and this trend is still at an early stage.

© db September 2007

Liv-ex is an independent trading and settlement platform for the fine wine trade.
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