The last 12 months have been challenging for the fine wine market. The fall in prices that started in July 2011 has continued after a brief despite at the beginning of the year. This has resulted in the Liv-ex 100 falling 27% in 1 year time.
The severity as well as the duration of this downturn has taken most by surprise. If you look at the trading climate, it was and to a certain extent still is like a perfect storm. There is continued and severe European and indeed global economic uncertainty. China’s economy is not as buoyant as it was and access to credit is harder. More specific to wine, demand from China has halted for the moment. Whilst demand from the end consumer is still there, it will take time to get through the stock that is currently sitting with merchants in HK and China.
And then there was Bordeaux 2011, a disastrous campaign that has actually caused price drops to gain momentum as it managed to alienate quite a few Bordeaux aficionados. A significant amount of investment wine has been dumped on the back of the campaign, primarily by private collectors that couldn't stomach the continuous drop in price as well as the negative sentiment surrounding anything Bordeaux.
At present, momentum is against fine wine investors, particularly where Bordeaux is concerned.
However, there are also a number of signs on the plus side, that we should take into account.
Firstly, if you look at above graph, you will see that the Livex 100 is back to the level where it was exactly 4 years ago. It is at the previous peak, just before Lehmann. More importantly, 4 years ago China had not started buying en masse. Therefore, the whole "China effect" seems to have been negated by now. If there was a bubble, it's not there anymore. Moreover, from a technical, chart-reading point of view, it is a powerful signal when a long term, falling trendline reaches a previous high.
Secondly, investment has become much more important than it was some years ago. There are professional investors like fine wine funds and reportedly even institutional investors active in the market. On top of that there are vast amounts of private investors. These companies and people won't go away, not unless fundamentals change dramatically, which is something we don't think will happen. The professionals in particular will keep on searching for value and opportunities and at some point, they will start buying again.
The third point has to do with short term, tactical market developments. Most stockholders that had to sell have by and large done so now. In a market as small as fine wine, this is significant as any marked increase in supply will drive prices down. This downward force seems to peter out. On the demand side, we see increased demand from our customers in China as well as UK investors. It's not a massive change but it's encouraging and it's being confirmed by fellow UK and French merchants.
The summer will likely be quiet, as it always is. We don't expect a significant change in sentiment over the summer, but we do expect prices to stabilise in general whilst the best investment wines might start to go up again. Expect bargains to become more difficult to come by.
There are some interesting strategies to take advantage of current market conditions. For example, there certainly are some classic investment wines that arguably have taken too much of a hammering. We also think there is value beyond Bordeaux. Some of those wine are not correctly priced, neither in absolute nor in relative terms. Please get in touch if you would like to know more.
Finally, when trying to make sense of the market, it is useful to remember that the fine wine investment market has changed dramatically over the last few years. It traditionally was something for the happy few, who’d buy en primeur, stick their purchases away for years and in the longer run did very well. Prices typically moved slowly and there were years where the market hardly moved at all.
Now, there are professional wine investment funds and a greatly increased number of private investors and companies that cater to them. There is new, but not necessarily stable global demand for wine. These people and companies buy, but obviously they also sell (rather than just drink). This has caused volatility to increase sharply, both up and down. Investment horizons have shortened. Buy and sell signals cause a much larger fluctuation now, simply because there is much more activity and supply is still limited.
This will spook some of the more risk averse investors. It also represents opportunity to the perhaps more brave investor.