Fine wine comment: Does Lafite have legs?

Joe Marchant, investment analyst at Bordeaux Index continues the Lafite analysis in the drinks business with a response to the Bloomberg News suggestion that the bubble must surely burst for China’s favourite château.

In our last column we ruminated on the seemingly insatiable appetite for Château Lafite in the Hong Kong/Chinese market. We looked at some of the factors contributing to its position as the primus inter pares brand in China and the corresponding premium that it now attracts versus its first growth brethren.

In a recent piece on Bloomberg News, columnist Kevin Hassett describes the “Lafite effect”, a phenomenon, whereby last autumn, in an environment of unprecedented correlations in asset prices, only holders of Château Lafite escaped the financial crisis unscathed. He suggests demand for Lafite has pushed prices “through the roof” and proposes that the potential for a speculative bubble in Lafite is of greater likelihood than not, concluding: “The risk of Lafite prices plummeting and wiping out your investment has skyrocketed along with the price.” 

Fine wine is in many ways a unique asset. In the simplest terms, with demand being consistent, price growth is a function of a destruction of supply through consumption. Within this equation, however, there are many variables, both qualitative (vintage/ratings, future supply, etc) and quantitative (total production/ released, inventory held as investment verses cellared, etc). By looking at recent prices and tradeflows of Château Lafite, we should have an indication of whether the recent strong recovery in prices is indeed speculatory or merely a function of demand increase and consumption.

Looking at first growth prices prior to and following on from last autumn’s financial crisis, it is evident that holders of multiple vintages of Lafite suffered equally the correlations between wine and capital markets that affected other châteaux. Peak to trough declines between August 2008 and March 2009 show that a basket of Lafite fell 16%, 2% worse than for Château Mouton Rothschild, but around 2% softer than Margaux, Latour and Haut-Brion.

This should not surprise. Reduced liquidity from nervous traders concerned about a reduction in future demand and the disposal of stocks by risk-averse investors created the perfect storm for price declines and in keeping with the story of correlation with capital markets, no château was exempt. However, the story of recovery for Lafite is a different one. Following the shocks of last October, volumes of Lafite very soon returned to pre-crisis levels. Availability of supply was greater (those nervous investors), but as that excess inventory was redistributed or consumed prices have recovered strongly. So far, so un-bubble. As we mentioned last month, the proportion of trade in general to Asia (and thus for Lafite) is rising, showing a 10% year-on-year increase in Asia-bound business. With this in mind, it is illuminating to take a look at the rest of the market.

 

Over the course of H1, Sotheby’s Hong Kong office has surpassed London wine sales by nearly 18%, and of their top 100 lots worldwide, almost 87% of bids have been Asia based. With Christie’s and Acker Merrill Condit reporting comparable results, it is clear that any projected decrease in demand for wine from the Hong Kong/China markets as a reaction to the financial crisis was vastly overstated. Furthermore a survey of bidders at a recent HK Sotheby’s sale found that investment was not a principle driver for purchasing, with very few bidders stating an interest in the future financial performance of their wines. While an isolated example, this is certainly in line with information we have gathered, both subjectively and looking at destination of completed orders for our business locally.

So, to summarise, given the higher levels of trade, low(ish) investment activity and lower inventory is it really surprising that prices for Lafite have recovered to pre-2008 highs? In our opinion, not really. We believe that short term, it’s hard to fight momentum. Cultural shifts in wine buying habits are slow to form, establishing new hegemonies of substitutable châteaux, even more so. To those asking what will happens when the Asian bid for Lafite ends, in H1 alone the Chinese central bank released stimuli of almost US$1.2 trillion. With Chinese GDP growth still targeted at 8%, there is an awful lot of money still sloshing around the system. If discretionary purchases of fine wine in China have increased despite suffering the worst of the financial crisis, we should stay used to increasingly uncomfortable Lafite prices for a while yet.

 

Joe Marchant, 01.10.09