The secular and the cyclical

In any market place there are two key points of change to keep alert to: secular change, and cyclical change.

In a nutshell, secular change involves anything which can be bracketed as long term evolutionary change. The arrival of the internet and IT revolution, for example, or the emergence of China into the global economy. The repercussions of events like this are lasting and wide-ranging: ‘the world will never be the same again’, sort of touch.

Cyclical change, as the name suggests, happens over a much shorter time frame. The environment has changed, but only for a while. Economic growth, ebbing and flowing as it does, is cyclical change.

From an investment perspective it is always important to be aware of whether what is going on is cyclical or secular, because it conditions how you play the market. At Amphora Portfolio Management we would argue, for example, that there was no real secular development in the fine wine market between the immediate post-war period and the early 1990s.

Over that time frame the world grew economically at a steady rate, inflation rose as people became wealthier, but the fine wine market remained the preserve of the very few. The châteaux would release their wines, which via the negociants and merchants would be allocated to well-heeled clients, in whose cellars it would stay happily increasing in value (as a result of the aforementioned economic growth and inflation) until they chose to drink or sell some to pay for what they wanted to drink.

In the early ’90s the Japanese awoke to the pleasures of this market place, followed by the Chinese post millenium, in what were undeniably big secular changes to the market place. So where are we now?

Let’s look at the sectoral performance of the sub-indices of the Liv-ex Fine Wine 1000 index:

When you look at any longer term performance the intoxicating effects of the near term tend to gain a little more perspective. It is easy to think on a five-year view that Bordeaux is a waste of time and the only place to put your money is almost anywhere else.

Virtually every month in 2014 seemed to laud the volume and rises in value of the Super Tuscans, yet there they sit alongside the Rest of the World (another short term significant out performer) joint second-last beating only the hapless Rhône.

What all this reflects is the inherent nature of cyclicality within a market place. Sometimes cycles are forestalled simply by previous outperformance, and this is what happened to Bordeaux. As a sector it was simply unable to sustain the meteoric rises over the pre 2011 period.

And this is where, you could argue, the cyclical meets the sectoral, because it was the very correction in Bordeaux that gave rise to a broadening of the market place allowing wines from Italy, the USA and Australia to come to the fore.

At Amphora we would argue that the market has now changed forever, in that the Tuscans and Napa wines, having arrived, are not now about to go away. This does not, of course, mean that they are immune from cyclical downturns themselves.

We find it anomalous, for example, that the relative parvenu Masseto 2001, without doubt a fabulous wine in its own right (with 98-points from Robert Parker), should trade at a higher valuation than the ‘perfect’ classic Latour 2009 (100 RP pts). Masseto 2001 is an outlier against its own sister wines, rather like Mouton 2000. This little beauty is a 96-pointer (RP) from a great and clearly iconic vintage (because it happens to be the Millennium year), and it comes in a prettier than normal bottle, but is it really worth twice as much as the 100-point (RP) 1986 and fully three times as much as the 99-point (RP) 2009? It may well stay egregiously expensive, but as Winston Churchill would have said: “that’s not where you place your bets”.

The whole market place changed forever with the arrival of interest from China. The wine market is obviously not peculiar in this respect. Since the late 1980s the global economy has changed in secular fashion with the emergence of China. But what else can we glean from the chart above?

The two regions hardest to gauge are Burgundy and the Rhône. Over the piece Burgundy has performed beautifully, fully justifying the ‘long-term hold.

The Rhône meanwhile has been a complete waste of time. The difficulty with Burgundy is its marketability. Most producers make such little volume that it enjoys almost immediate scarcity as soon as it comes to market. You try getting on to Corney & Barrow’s client list.

They are sole importer for Domaine de la Romanée-Conti into the UK, and clients take their whole allocations of whatever they are given safe in the knowledge that the odd bottle of La Tache or Romané-Conti they are lucky enough to receive will have a market value at a huge multiple of their in-price.

This is all great, of course, but over the last few months it has become increasingly difficult to find bids for the more expensive labels. Hardly surprising given that you have to be looking for a relatively ‘poor’ DRC if you can’t afford £100,000 a case. Holders have to hope such selling will arrive in dribs and drabs.

Rhône is a different matter. The famous ‘La La’s’ from Guigal are as scarce as the top Burgundies, and have achieved more 100-point scores as a vineyard than any other in the world, yet as investments they languish unloved at the bottom of the ladder.

The main reason for this is likely to be heritage. As producers only over the last 50 years their pedigree against both Burgundy and Bordeaux is sorely lacking. That said, they want nothing against some of the cult wines from the USA, which are constantly in demand.

Fortunately the fine wine market has opportunities aplenty allowing us to leave the Côte Rôtie on the shelf for the moment. I might be a buyer in small part over the very long haul, but certainly wouldn’t build a fine wine portfolio around it.

There is no cyclical updraft in sight. As to the rest, the recent performance of the Liv-ex 50 is telling us that Bordeaux and its first growths are coming back into fashion. In the absence of any secular interference we at Amphora are inclined to take advantage.

Philip Staveley (pictured) is head of research at Amphora Portfolio Management. After a career in the City running emerging markets businesses for such investment banks as Merrill Lynch and Deutsche Bank he now heads up the fine wine investment research proposition at APM. www.apmwineinvestment.co.uk