Taking the Japanese approach

Over the last 10 days a couple of Amphora Portfolio Management directors made a whistle stop tour of the Far East. It is always fascinating to see the contrasting reception each centre gives to the concept of fine wine investment.

Over the years we have come to understand this: what works for one doesn’t necessarily work for another. Nor are “racier” places like Hong Kong and Shanghai any more keen to rush headlong into a bargain than anywhere else. Different cultures require different approaches, and it is a mistake to think that just because Hong Kong, Shanghai and Taiwan are all Chinese they will all want the same thing. They don’t.

On this trip, in addition to those three great places we also went to Japan, where over two days we gave four seminars in Tokyo, Osaka, and Nagoya. You might expect the Japanese audience to be polite, and indeed they are, unfailingly so.

Here is Amphora CEO David Jackson hosting a typical Japanese seminar. Anyone who has ever witnessed the equivalent in HK or Shanghai will notice a stark contrast. Not a mobile phone in sight! Everyone awake and, dare I say it, attentive!

The interesting thing is that the Japanese seem to take the same approach that we promulgate here in the UK. They analyse the opportunity against the rest of their investment portfolio, and make an allocation accordingly.

Elsewhere in Asia the approach is very different: they take a view on the merits of an investment in fine wine outside of any other consideration. In other words, it does not form part of a broader strategy. Our sense at Amphora is that this is because the Chinese high net worth individuals represent an owner/operator society, where the majority of their income is reinvested into their businesses.

For them an investment in fine wine ranks alongside any other luxury purchase. The Japanese by contrast are more of an employee society, albeit a wealthy one, with that wealth accumulated over a longer period than in, say, China. They are therefore, perhaps, more familiar with the structured portfolio diversification process.

Notwithstanding, a very positive message came over loud and clear on this occasion, particularly in Hong Kong. The reason Hong Kong is important is that it is the most significant channel for Chinese purchases of fine wine, and this is the location for many of the merchants who service the Chinese market. Although we would seldom suggest that a fine wine investment should be made through a merchant, their bid/offer spreads being antithetical to the making of satisfactory investment returns, it is important to keep an eye on how busy the merchants are.

In any recession, inventories are allowed to subside. Why waste money keeping the shelves full when you can’t be sure anyone is going to buy what’s on them? It follows, that one of the first signs of economic recovery is a rebuilding of inventory levels, and we have observed exactly this over the last year or so in the fine wine market. Hong Kong merchants were anecdotally very long of inventory for a long time after the Bordeaux peak in 2011. Over the last few years this has been drawn down, and from late summer 2015 we noticed an increase in interest once again from that quarter.

Right now we think it fair to say that stock is “flying off the shelves”, which is a very positive sign indeed for an expansion of the current rally. The merchants now find their stock levels limited and running low. All the offers listed on wine-searcher HK get hoovered up before you can get to the phone to enquire about availability. Clearly a lot of people in Asia are taking advantage of the current weakness in Sterling, as well as returning to the market before prices rise even further.

Meanwhile the Liv-ex 50 has just ended October with a further healthy tick-up. That makes 3.5% for the month, slightly behind the broader Liv-ex 100 which rose 3.6%. Prices are rising over a broad front and the top regional performances from the broadest index are actually from Champagne and the Rest of the World, where one of our long-time favourites, Vega Sicilia Unico 2004, has been to the fore.

This is important because it is far healthier for a market to advance across a broad front than a narrow, and if the focus remains for any length of time on the Rest of the World then we can expect Penfolds Grange to participate further. We have highlighted in recent notes how important it is to pick up the more illiquid wines when things are quiet, and the 2008, for example, has leapt from £4,000 to £5,000. The 2011 which has just become physical has also seen a lot of buying, driving it from £3,000 to £4,000, highlighting real value in many of the superior back vintages.

It is very important to register the psychology that goes with all of this. Just as it is almost impossible to get anyone to pick up a bargain when the market is in the doldrums, so when it is running like this you can just about call your own price.

One of the most significant features currently is the bid/offer spread on the Liv-ex. Aside from one or two peculiarities like Lafite 2010, the spreads have tightened dramatically, often into single digits. When the market shows signs of insecurity this can happen if sellers are happy to offload, reducing their offer prices down towards the only available bids. There is little such insecurity in the current phase though. At this point spreads are shrinking as buyers bid up for stock. It is an extremely healthy sign, and is a harbinger of further good times ahead for the fine wine investment market.

Philip Staveley 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 Amphora Portfolio Management