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13 January 2011Fine wine prices, bubble and currencies

The latest monthly bulletin from Liv-ex, shows the effects of currency exchange on the strong price appreciation among the London trade, suggesting there may yet be some way to go amid increasing concerns about a fine wine bubble. Supporting this interpretation are the results of their benchmark Liv-ex Fine Wine 100 Index, which the exchange has converted into other major international denominations, including Gold. 

The Liv-ex Fine Wine 100 Index is widely taken to be the industry benchmark and tracks a trade-weighted basket of the 100 most sought-after wines with a ready secondary market. The index includes wines from Burgundy, the Rhone, Champagne and Italy, but, unsurprisingly, Bordeaux is by far the dominant composite, in December accounting for 96% of total exchange turnover. 

Report highlights note that trading activity doubled in 2010, whilst prices as measured by the Liv-ex Fine Wine 100 Index are up 41% in just one year. The 2008 vintage saw the most spectacular increase, doubling the gains of its nearest rival, the previously unsung 2007, with overall gains since the initial release of the vintage even more impressive. 

Currency effects. Against such a background, fears of a bubble – in particular among the Bordeaux top 8 – are understandable. Nonetheless, when converted into other hard currencies the Sterling-based index shows a markedly different pattern. Liv-ex figures show that when converted into Euros, prices only surpassed their July 2007 high in the last quarter of 2010. Denominated in US Dollars, the index remains (just) off its June 2008 peak. This differential is most visible when converted into Yen, the index being a whopping 29.7% below its historic high. What then of China? Firstly, when converted to Renminbi, the index comes in at 10% below its all-time high, thus, for the Chinese buyer, wine still remains within a familiar price zone. The country, the major driver for global demand, probably accounted for up to half of the index appreciation for 2010 (Source: The Wine Investment Fund, the drinks business 13-01-11).

The wider market. Wine trade fundamentals continue to be in rude health with demand for top wines far outstripping supply. The market remains liquid, whereby investors and collectors alike have seen important gains and the Bordeaux Place has become highly-capitalised, against the backdrop of a string of quality vintages with 2010 looking set to bring in another excellent (albeit expensive) offering.  

Again Liv-ex, brought this piece of news today: “While recent press articles seem to have concentrated on the fine wine bubble story (with Lafite in particular focus), the IMF has published a very interesting piece comparing the fine wine and oil markets. Its conclusion? There is a 90% correlation between fine wine and oil and an increasingly close correlation of both of these "asset classes" to emerging market GDP growth. Yesterday we published our January Market Report- in it you will find some rather interesting charts depicting the Liv-ex Fine Wine 100 Index in base currencies other than Sterling. The market has only just retraced its 2007 highs in Euro terms and remains under water in Renmimbi (below), Yen and gold terms. Bubble?” 

One could be forgiven to think that, for all buyers that don’t pay in sterling, prices have not gone as mad as it would seem. 

 

 Categories: InvestmentChinaBordeaux

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