Don’t panic, Captain Mainwaring

It is a truth universally acknowledged that a young man in possession of a good fortune must not panic when the do-dah hits the fan. Captain Mainwaring please note. No decent investment decisions are taken when judgement is clouded by emotion, but it is precisely when things go pear-shaped that extreme value can appear.

Concepts of value are elusive in discussions about physical assets, but if something costs £1 one day and 90p the next, the one thing you can state is that it is cheaper than it was yesterday.

This is the situation the fine wine market place finds itself in, in respect of foreign investors, and quite frankly it comes at quite a helpful time for that market.

To very briefly recap, a largely Bordeaux centric market skyrocketed from 2007 to 2011, corrected from June of that year, at which point non-Bordeaux wines took up the slack, and we have been waiting since then for leadership to return to Bordeaux.

Several en primeur campaigns have been and gone, most of them being blamed for the lack of energy in the Bordeaux sector. Interestingly this year, the best since 2010 in terms of overall vintage quality, hopes had been kept in restraint that the campaign might be the stimulus the market needs.

But all along something different has been afoot, and we have written about this before, but it is pertinent again now. Last November the bottoming of prices and recovery in Bordeaux had been inspired by Sterling weakness. In the run-up to last Friday’s vote, prices had been ticking up quietly but steadily for about six months, but awaiting fresh impetus to really get going. And fresh impetus is what it got.

According to Liv-ex, trading last week had not only become quieter, but the ratio of bids to offers had declined. Then suddenly when sterling declined in the immediate aftermath of the vote, they did a whole day’s business in a couple of hours.

We should not underestimate the importance of offshore trade to the fine wine market. The evidence is that it has capacity to have a lasting impact, and just when the post en primeur/summer lull had been about to set in, it has made its presence felt once again, driving the Liv-ex 50 up to the highest level since 2014.

This is very helpful, not just to the market overall, but also to our view that Bordeaux is going to pull its weight in the next leg of the upswing, so where might the bargains lie now?

At some point the egregious pricing of the 2009 and 2010 vintages will have gone through the wash. The concern here is that these wines were in effect soiled by an almost immediate after-market correction. Investors will have had time to make a paper profit on en primeur purchases of the 2009s, but by the time they became physical the decline had already set in. At no point will the 2010s have ever turned a profit.

In stockmarket terms, pricing of an IPO (Initial Public Offering) is crucial because whilst the vendor wants as good a price as possible, it is in his/her interests, and particularly the interests of their advisers, to have an encouraging immediate after-market. In other words, something has to be left on the table for the secondary market.

Failed IPOs can take an age before coming back into fashion, because a lot of stock can be left with the underwriter of the issue, who dribbles it out into the market over time causing a seemingly endless supply which demand can take a very long time to absorb. This is what has happened to the 2009 and 2010 Left Bank wines, as you can see from the chart of Lafites 2008, 2009, and 2010.

A slightly different effect took place with the 2008, but with a similar result. The 2008 became physical in early summer of 2011. Prices for the en primeur contracts had exploded in the prior 12 months. Casual investors and collectors would not normally buy such contracts, because their fulfillment is dependent on the validity of a contract earlier in the chain, so it is likely that these were bought by professional speculators, whom we know were at work at the same time in the physical market for earlier vintages.

At last, after a lengthy period of abstinence, we at Amphora are starting to increase weightings towards these fabulous but hitherto ill-starred (in investment terms) vintages.

We take this opportunity to reiterate that having seen the Latour 2010 jump in recent weeks, investors could do much worse than to pick up the 2009, and we will be highlighting other bargains in the coming weeks as foreign buyers in particular take advantage of the current sterling weakness.

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