Postcard from Japan

At the end of January we highlighted the importance of currencies in considerations about investments generally, and fine wine in particular, as the secondary market is denominated in Sterling.

In the same note we referred to the importance of Japan to the fine wine trade, and last week Amphora Portfolio Management sent two directors to Japan and Taiwan to see clients and take further soundings on the ground.

The Japanese’ investment predicament is really quite acute. Their own economy has been stagnating for over 20 years now, despite various administrations’ attempts to breathe life into it, most recently, and indeed currently, through prime minister Shinzo Abe’s “three arrow” strategy: monetary easing, public spending, and structural reform.

Notwithstanding these efforts the Japanese stock market struggles to recapture its former glories.

You might wonder what can be wrong with a market which doubled post 2008/9 crash and which is still up 60% from its lows, but remember the Japanese demographic in which pensioners represent an increasing percentage and you can imagine that most investors are long term, and over the long term the market has struggled to break through the 20,000 barrier.

Not only that, but interest rates are at punishingly low levels for savers, and whilst property prices may be rising slightly for new builds, land prices are still falling and unoccupied homes across the country are at record levels.

In short, it’s tough for investors to make a turn, and as a result fine wine investment is once again on the Japanese radar.

Japan’s interest in fine wine for both investment and consumption dates back to the early-mid 1990s, when inflows from there helped the Liv-ex Investables index more than double between 1995 and 1997.

Tastes and popularity seem to have been sommelier driven, rather than critic or merchant led. Burgundy has always been very popular, leading people to wonder whether there is something in the Japanese palate making Burgundy’s finesse more desirable, however there is also the possibility that sommelier opinion was so powerful that consumers were influenced accordingly.

Anecdotally, high end wines, not just from Burgundy, are on sale all over the place in the major towns, and it is not unusual to see bottles of Burgundy in shop windows priced at the equivalent of £200. A closer inspection of some of these outlets revealed that it was quite customary to see bottles of Petrus and DRC not only on offer but being readily purchased.

That said, undeniably it seemed that Italian wines were most currently in vogue. A lot of people we spoke to happily recounted trips to Piedmont and Tuscany, where they said they had received a better welcome than in France.

From an investment perspective this raises the question as to whether this will sustain the rally in the Super Tuscans, and help the investment profile of Barolo, which we will be looking into in the coming days.

On this trip we also went to Taiwan, where again there is increasing demand for fine wine investment services. There the focus is on higher cost wines, cult producers like Screaming Eagle being particularly popular.

This fits with widely held Western perception of the Asian psyche, where designer labels are so much in demand, but it could also lead to a broadening of interest in producers whose secondary market has hitherto been relatively thin. From an investment perspective this is very important, because a market is only as good as its liquidity.

Scroll back to 2011 and you will find that there was hardly any liquidity at all in the likes of Masseto and Sassicaia. When the crisis hit Bordeaux prices, they came to the fore and the Super Tuscans became the darlings of the market for a good while.

An investor has to be careful in the fine wine market though because unlike Warren Buffett, who buys his value then waits for the rest of the market to catch up, an investor in many a fine Australian wine over the last few years has been left wondering why the world hasn’t caught up, and ends up trading out at a huge loss. And the catalyst for turning an investment loser into a winner can be quite elusive.

Suffice to say though, Screaming Eagle is on something of a roll, and looks like being an investment target at least for Taiwanese investors for some time to come. Like the Japanese, the Taiwanese also have to look to their currency.

Over the last 10 years the New Taiwan Dollar has traded in a range of 68 to 44 against Sterling, and is currently 46, almost at its 10 year high. As Steve Maunder of Cavex points out: “The main play at the moment is currency. This has led to continued buying from Asia after Chinese New Year and also an increase in bid volumes and prices moving off the bottom in London.”

It really is that important.

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 APM. www.apmwineinvestment.co.uk