FINANCE: 2005 Alive

While the story of 2007 was China, which will continue to be a market driver, this year’s big fine wine theme will be 2005

November showed signs of the end-of-year slowdown a little earlier than usual. It seems that traders were happy to close their books and take a well-earned break. Volumes held up well year on year (up 28%), but slowed a little from October. The Liv-ex 100 recorded its fourth straight down month with a decline of 0.6%, reducing the 12-month gain to 42.1%.

The year as a whole has been another good one for fine wine. Despite a sharp dip in en primeur activity, transactions on the exchange will be up nearly 40% in 2007. Surprisingly our top brand by value on the exchange was Mouton Rothschild, with 13.2% of trade, narrowly surpassing its super-charged cousin Lafite, with 13.1%. Some believe a revival is underway at the Château after years of underperformance relative to the other first growths. Mouton produced the wine of the vintage in 2006. This lead to an across-the-board re-pricing of the wine. During the year Mouton’s price increased 50% on average – outperforming the wine market as a whole.

La Mission Haut-Brion has also had a stellar year after making top wines in back to back vintages in 2005 and 2006. The wine was among the top 10 brands traded on Liv-ex in 2007 with 3.5% share and was third in performance terms with a 64% return.
Carruades de Lafite was again at the top of the performance charts with a 112% return overall. The wine even surpassed Lafite, in second place with a 94% return.
The super seconds, however, had a particularly difficult year and for the most part slipped back in the rankings in terms of both market share and price performance. All failed to keep pace with the overall market and only Pichon-Lalande made it into the Liv-ex trade top 10.
The big theme in 2007 has been China and this factor has certainly driven the fortunes of the Lafite stable. We suspect that the Far East will continue to be an important driver of demand into 2008, but watch for interest to spread into other brands. Forts de Latour, for example, our highest new entrant into the top 50 brands at number 17 is gaining favour in China, as is Pavillon Rouge. Other brands to watch include Talbot, Pontet-Canet, Duhart-Milon, Branaire-Ducru and Beychevelle.
In the year ahead, one can’t help feeling that the wine market is going to be held hostage to events beyond its control. Some kind of slowdown in the global economy is widely expected, particularly in the US and UK. Both are still the most important markets for fine wine. The 2007 Bordeaux vintage is unlikely to set anybody’s pulse racing. The Bordelais – always brilliant with words – are describing the vintage as “very good in different ways”. It is true that the vintage was saved by a dry September, but overall it was a difficult growing season, yields will be small and commercially it will be unexciting. As such we feel that the market is most likely going to tread water in 2008, but after two years of uninterrupted gains this has got to be healthy.

The big theme in 2008 is going to be 2005. It is becoming clear that 2005 is the greatest vintage in France (as a whole) since certainly 1990 and possibly 1961. As these wines become physical and Parker and the other critics retaste these wines in the new year, there will be a considerable amount of trade to be done, particularly in Bordeaux’s best names. Indeed, anyone expecting a wholesale sell-off in 2008 is likely to be disappointed.
While we are likely to establish a new floor for fine wine in the coming 12 months, demand for 2005s and the strength of the fundamentals will provide a solid floor to prices. If anything the top producers have become more quality conscious and are producing less wine than they were 10 years ago. Similarly, the two big structural trends for demand – global growth and increased transparency – not only remain sound, but are also in their infancy. Predicting that fine wine prices are going to continue to rise is not rocket science, just simple economics. As such 2008 should be viewed as a buying opportunity.

© DB January 2008