Market review: Cautiously optimistic

The second half of 2011 saw a downturn in the fine wine market, but the long-term fundamentals remain in place, writes Stuart George.

2011 was quite a year. There was financial turmoil in Europe and social unrest in the Middle East. Global markets were up and down. Japan’s Nikkei 225 index, for example, closed at its lowest end-of-year level since 1982. But collectibles and luxury goods of all types had an exceptional 2011. Rolls-Royce had its best-ever year and record prices were set for artworks, stamps, comics and, importantly, wine.
On the face of it the fine wine market was in rude health in 2011. But the secondary market away from the auction rooms of Kowloon told a different story. The London-based fine wine exchange, Liv-ex’s Fine Wine 100 Index, which “represents the price movement of 100 of the most sought-after fine wines for which there is a strong secondary market and is calculated monthly”, dropped by 15% in 2011.

Auction Houses in 2011

Despite a downturn in the second half of the year, most auctioneers had their best-ever totals in 2011.

New York City-based auction house Acker Merrall & Condit achieved US$110,454,801 (HK$856,672,263) in sales (including a 22% buyers’ premium), the highest-ever annual total for a wine auction house and a 12% increase on its 2010 total.  Acker Merrall claimed “more than 500 records established in 2011”, including the “biggest auction of the year”, which made HK$112,740,200 (US$14,453,872) on 8 and 10 December and included the “most expensive auction lot of the year worldwide”, a 1952-2007 vertical of  that sold for US$666,666.

Sotheby’s 2011 sales reached US$85,467,096 (including premiums of 15-21%), just behind 2010’s total of $88.27 million. London wine sales realised $27,191,060, the highest annual total there since the wine department was established in 1970 and an increase of 30% on the 2010 total of $20.97m. Christie’s totalled $92,672,909 (including premiums of 10-21%), from 29 sales conducted across six salesrooms.

Zachys’ worldwide total for 2011 was $78,969,614 (including a premium of 21-22%), of which $31,742,214 was from US-based sales, with the remaining $47,227,400 from Hong Kong sales.

Chicago auctioneer Hart Davis Hart made $37,425,857 from seven sales (including a 19.5% premium), a slight decline on its 2010 total. Bonhams’ Wine Department finished 2011 with a year-on-year increase of over 40% for the second year running, totalling $17m from its sales in the UK, US and Hong Kong (including premiums of 15-19%).

Despite these vaunted totals, the amount of wine sold at auctions globally is still less than the estimated $1.7 billion tax liability of Facebook CEO Mark Zuckerberg if he exercises his option to buy 120m shares of the company. With higher prices being achieved in Kowloon than Manhattan, and the Hong Kong dollar pegged to the US dollar, American consignors are often tempted to sell their wines in Hong Kong.

• London Calling
• London is taking business away from New York, too. London is eight hours behind Hong Kong as opposed to New York’s 13 hours, meaning that buyers in Asia do not need to stay up as late to bid by phone or internet.
• Significantly lower premiums – successful bidders at Sotheby’s Hong Kong sales pay 22.5% commission against London’s 15% – and the relative weakness of sterling against the euro and dollar also make London an attractive place in which to buy wine.
• Lafite – Just another wine? Record amounts of wine were sold in 2011 but the fourth quarter saw the market slip. According to Wine Market Journal, “Q4 delivered precious few 100% sold auctions. In fact, only four of the 40 auctions that took place in Q4 registered a perfect sold rate”.
• Sotheby’s 2 October sale, which had a clearance rate of 93%, ended a run of 16-consecutive 100%-sold sales in Hong Kong. Volatility often signals a change and this was confirmed at Christie’s tepid 25-26 November sale, which had a poor clearance rate of 77%. The house’s overall clearance rate at Hong Kong sales was only 82%, well below its other locations.
• There were signs earlier in the year that the market was softening – or at least that demand for Lafite was in decline. A case of 1982 estimated at $40,000-60,000 made a $38,000 hammer price at Hart Davis Hart in June, the month when the Liv-ex Fine Wine 100 peaked.
  Lafite, it has turned out, is just another wine.
• The days of Chinese paying whatever it takes to get that case of 1982 are over. Like gold and oil, it became overpriced because of speculative buying. Andy Xie, a Shanghai-based independent economist, saw it coming. In November 2010 he wrote, “What I have seen and heard in the past few months convinces me that not just Lafite but the whole fine wine market is a bubble.
• Like other assets, the force for the bubble is the low interest rate environment. Bernanke is a bigger reason for fine wine prices than 1.3 billion Chinese… If I had a lot of Lafite, I would be selling.”
  April 2011 saw 33 cases of Lafite 1982 sold at auctions; 32 were sold in September. In 2010 a total of 68 cases were sold. On Liv-ex not a single case of 1982 was sold from February to October 2011 and only three cases were sold in the entire year. The secondary market away from auction rooms had already decided that Lafite was passé.
• Auctioneers continued to whip up the Lafite “myth”, though. A 25-case lot of Lafite 1981-2005 sold for HK$3,500,000 ($450,648) at Christie’s Hong Kong in September, but this proved to be its last hurrah in the Asian market. By October 2011 Hong Kong was saturated. Overexposure, excessive prices and forgeries led buyers to look elsewhere.
  Young vintages of Bordeaux have become cannon fodder, their prices collapsing like a cheap flat-packed coffee table. For example, at Hong Kong auctions Lafite 2008 has gone from $2,300 a bottle in October 2010 to $830 in January 2012. It appears that the market has corrected itself: after falling for six consecutive months, the Liv-ex Fine Wine 100 posted a rise in January 2012.
• The China Syndrome
• Tabloids continue to report gleefully on Chinese excess. In January it was reported that the shipping magnate Hu Zhen Yu had splashed out £207,000 (HK$2,566,924) for a bird purchased from the Belgium-based website Pigeon Paradise.
• The global financial crisis has “left no lasting wounds” on China, India, Brazil and other emerging economies, according to a recent IMF report. New apartment blocks and shopping malls continue to spring up in Beijing and Shanghai.
• But China’s exports of Christmas decorations and cheap clothes are exposed to the lack of spending power in the West. If Walmart customers are not buying Chinese-made goods then there is less money for China’s bao fa hu (explosive rich) to spend on wine. Year-on-year gross domestic product in China expanded by 8.9% in the three months to the end of December 2011, down from 9.1% in the previous quarter.
• As their spending power has softened Chinese buyers have become smart enough to spot value and shun risk in an overheated market. Fine wine is now bought and sold in a global market with great transparency of information.
• As Gary Boom, managing director of London-based merchant Bordeaux Index, says: “What we’re seeing is a move towards quality and rarity in the UK and Asian market. The bottom line is that wine is still proving to be an attractive investment – but buyers have become more savvy and the market is diversifying.”

Great Expectations

The Danish scientist Niels Bohr said: “Prediction is very difficult, especially about the future.” But 2012 is unlikely to be as hot as 2011. The cooler market might mean less speculative buying and less “hot money” being thrown around. Vendors will have to reduce their expectations for some wines by 20-30% – perhaps even more for Lafite.
Goethe observed: “The rich want the best wine; the poor just lots of wine.” Nowadays, the rich want lots of the best wine.

The long-term fundamentals for the fine wine market therefore remain unchanged: there is an increasing number of very wealthy people with an appetite for fine wine, which by its very nature will always be made in relatively small quantities.

With the possible exception of Champagne, which revised its AOC boundaries in 2008, supply is fixed (though châteaux and domaines are not audited on their production levels – would investors buy shares if they did not know how many had been issued?).

Figures and anecdotal evidence show that the brightest star in the current market is Domaine de la Romanée-Conti. As with Lafite, intense demand in Asia for an already scarce product will cause speculative buying – and encourage forgers. The controversy surrounding several DRC lots at Spectrum and Vanquish’s February auction in London show that scrutiny of these wines is and needs to be higher than it has ever been.

The shift towards Burgundy is epitomised by the catalogues issued for February auctions from the major houses: they all have Burgundy lots on the cover.
As for the long-term prospects for fine wine in China, as Zhou Enlai, premier of the People’s Republic of China from 1949 until 1976, replied when asked about the impact of the French Revolution of 1789: “It is too soon to say.”

Feature Findings

• On the face of it the fine wine market was in rude health in 2011. But the secondary market away from the auction rooms of Kowloon told a different story.
• Lafite, it has turned out, is just another wine. The days of Chinese paying whatever it takes to get that case of 1982 are over. Like gold and oil, it became overpriced because of speculative buying.
• If Walmart customers are not buying many Chinese-made goods then there is less money for China’s bao fa hu (explosive rich) to spend on wine.
• There is an increasing number of very wealthy people with an appetite for fine wine, which by its very nature will always be made in relatively small quantities.