Fine wine investment: Petrus and the Fire Rooster

We were interested to see a headline in the Evening Standard last week whose article ran rather along the lines of the UK retail sales being boosted by Chinese visitors. The statistics behind these assertions show tourist arrivals from the Middle Kingdom rising at a prodigious rate, flight bookings in January 2017 for example were up 81% over 2016.

There are several reasons for this, notably a lubrication in the Chinese foreign travel visa system as well as the relative cheapness of sterling, but the driving force behind it is the burgeoning middle class in China.

Amphora Portfolio Management was lucky enough to have as a visitor in the first week of the year one of its Chinese partners, this one from Guandong province bordering Hong Kong. Given that its capital Guangzhou has a population by some estimates as large as 25 million souls, it is a good place to have a local partner.

We know that the frenetic rate of Chinese buying of fine wine cooled down considerably after 2011, largely as a result of the authorities’ clampdown on egregious displays of wealth and the attempts to cut back on bribery. The Amphora view has been that the effect of this suppression of interest would be temporary, for two reasons.

Firstly, it is very difficult to distinguish between blatant bribery, and what is known in China as “guanxi”, which is essentially the peddling of influence. Guanxi is an integral part of both Chinese culture and the Chinese psyche, and it is beyond the capability of a single administration to eradicate it. It is like being told that face will no longer be relevant in Asia.

Secondly, the dam has well and truly broken in China. Chinese citizens have to be over 35 to remember what is was like to be isolated from the rest of the world. As the above point about tourist arrivals makes clear, there is only going to be increasing interest in Western luxury goods.

Let us be very clear: fine wine is a Western luxury good.

So it was encouraging to hear our partner talk of the resurgence of interest in fine wine in China. There are significant import duties, but it doesn’t stop consumption. Only this weekend we received a ‘WeChat’ (more or less the Chinese equivalent of ‘Whatsapp’ although with many additional capabilities) with a request for Petrus 1973, 1983 and 1986.

We shouldn’t be surprised at the nomination of Petrus either: notwithstanding the popular view that Chinese buying is behind the spectacular performance of the second wines over the last year, it is our understanding that the well-heeled are still principally interested in first growths or their equivalents, and 100-pointers.

On Tuesday we saw a ‘hard Brexit’ confirmed, with all its inherent uncertainties. Less uncertain, perhaps, is the impact on sterling. Until the vast array of trade deals are confirmed in the post single market environment it is hard to see sterling bouncing back too much, however near the front of the queue Donald Trump places the UK. In that light foreign buyers are in for a bargain for some time yet, notwithstanding Tuesday’s rebound from the earlier lows.

Nor should we forget that from an investment perspective the medium and longer term performance of sterling is important for a foreign investor too, and a lot of the people we are talking to seem to believe that this window of opportunity will not last forever. In other words, they believe the second part of their investment return is likely to be from a recovery in sterling.

In the market the year has started quite firmly, leaving behind the slight dip in early December. Around this time it is traditional to expect some stimulus from buying ahead of Chinese New Year, which this calendar year falls towards the end of January. The year of the Rooster beckons. Your correspondent is a ‘Fire Rooster’, to be precise, and indeed anyone born in the coming year will also be a Fire Rooster, as opposed to a Wood, Earth, Metal or Water Rooster. Amphora clients will be delighted to learn that the characteristics of a Fire Rooster include being trustworthy and being good at managing money!

Finally we have received a lot a queries year to date on the Burgundy 2015 vintage. One of the ongoing frustrations in the fine wine marketplace from a purely investment perspective is the illegitimacy of Burgundy. Such an outlandish claim needs some justification.

Burgundy essentially comprises a wealth of tiny plots, whose production levels are minuscule. Much as every MW might recommend you have a bottle or two in your collection, this scarcity conspires against investment. Of course scarcity can be a great thing to help you make money, indeed increasing scarcity in general is a cornerstone of the fine wine investment dynamic, but there comes a point where it becomes a liability, in pure investment terms. The reason for this, is marketability.

The bottom line is that an investment only qualifies as such if you can sell it, and you can only sell it at a reasonable price if there is a ready market. Liv-ex is the principal market place for the transaction of fine wines, and although there are still plenty of over the counter trades conducted off market, as it were, a look at Liv-ex gives a flavour of the difficulties Burgundy presents. Incredibly few bids or offers, let alone trades.

There is an additional reason for this, other than scarcity. Producers of Burgundy look down their collective nose at non-consumption related activities in respect of their wines. As a result, if you are caught making a secondary market transaction with any part of your allocation (the only realistic way of laying hands on any at a reasonable price is through a long-standing relationship with your merchant), that will be the end of your allocation.

So enjoy Burgundy if you get the chance, and collect it for eventual consumption should you so wish, but if you are an investor do bear in mind that liquidity may well count against you.

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 with Amphora.