There’s always loads of noise and comments on blogs, websites and Twitter when Fine Wine prices are going up, often amounting to plugging one’s own business. As of the last month or 2 though, I have not seen many comments on the current state of affairs in the fine wine market, whilst there’s more need for that than ever. So we thought to have a stab at explaining the market and provide readers with some transparant, meaningful information.
Being on the forefront of the fine wine trade, we have a pretty good understanding of market forces. In our team, there’s thorough understanding of not just fine wine, but of luxury markets, of macro-economics and of financial markets. So we’d be pretty well positioned to make coffee out of all what’s happening in the fine wine trade. However, we don’t have a crystal ball so don’t sue us if we get this wrong. And like Keynes said, “in the long run we’re all dead”.
At the moment, prices of Bordeaux investment wines are coming down. From the top, late in June, to now, the benchmark Liv-ex 100 has fallen 13%. There is demand, for sure, but buyers need a discount. The market has transformed from an extreme sellers market into a buyer’s market.
Looking wider than the Fine Wine market, the broader financial markets are in turmoil and have fallen as a consequence. Uncertainty, fear even, seems to rule. No less than £75 billion was taken out of the equity markets since April, more than in the same amount of months post Lehman in 2008. As long as the possibility of Euro members defaulting, and all ensuing consequences to global economic growth, loom large, investors struggle to get their valuations right. Not to mention the risk of major, developed economies falling back into recession. In comparison, fine wine is doing relatively well.
The million-dollar question is, of course, where this will all lead. Rephrase, where this will all lead to in the short term, because in the longer run, the fundamentals for fine wine investment are still in place. It takes more than temporary oversupply, or even a massive new market like China, to structurally dislodge the fundamentals of top fine wine. There simply is not enough supply for demand. At the moment though, there are some conflicting forces at work. Right now, the “bear/against” camp is winning the battle, but our belief is that the “bulls/for” side will win the war. Please see below for our thinking behind that.
Fine wines prices will slide further
The bear camp would say that Fine wine prices have gone up way past their historical average. Therefore, a correction is long overdue. In fact, 13% is not much of a correction. In comparison, in the autumn of 2008, the market came down by 25%, after which the index increased by 80%. We will need to see another 10-15% at least before we get back onto a sustainable path.
Furthermore, they'd argue, a major driving force of the last 3 years or so has been Chinese demand. Whilst we all thought that every single bottle sold to China was immediately necked for lunch, it now becomes apparent that this is not the case. It’s not all being consumed, "they" do not drink it all. Although a disproportionate amount of expensive wine does get consumed. At the moment, Chinese traders hold too much stock, bought when prices were going up, with the aim of selling it at a later stage. This “clog” needs to clear the pipeline before prices can move up again.
But, the bears argue, that might take a long time as the Chinese consumer is not prepared to pay ever increasing prices for Bordeaux, particularly now that they are getting more interested in other regions that make equally good wines. This might not hold true for 1st Growths, but it could well have an effect on other Classed Growths.
Finally, due to fine wine now being an investment vehicle, the market is much more volatile. Swings can be much more severe than we’re used to. When stockholders get nervous, a massive supply can suddenly hit the market and erode confidence.
Fine wines prices will soon start rising again
The bulls see it differently. The fundamentals are unchanged. Supply is still very limited in relation to demand, it's finite and impossible to increase. Luxury markets worldwide are booming. That is a trend forecasted to grow and continue for many years. A blip in confidence, a recession even it if comes to that, will not change that. Demand therefore will be larger than supply and we know what that does to prices.
Furthermore, the Fine Wine market is about 1/15th the size of funds leaving equities in the last 4 months. All that money needs to go somewhere and SWAG’s (silver, wine, art and gold) see a piece of the action. Even if only 1% were to go into wine – £750m – that would be roughly 15% of annual fine wine turnover and more than enough to have large implications on prices and availability. Don’t underestimate the influence of wine investment, it’s massively important, particularly in the UK, the US and, dare I say, in HK.
The relative lack of demand we currently see is temporary, healthy, and largely the result of fear on the financial markets. Once there is a sense that European leaders start sorting out their mess, once more people start calling the bottom, then uncertainty will make way for a sense of perfect timing to get invested. And the bulls think that will have a direct effect on Fine Wine. All we need is an important party to start buying. In fact, judging by today’s activity, that moment might have come.
A word of warning
Message to the Bordeaux chateaux owners: don’t be greedy. Don’t kill the goose with the golden eggs with unsustainable pricing. The 2010 Primeur campaign did not go down very well, not with Le Place, not with merchants and certainly not with consumers. These are the people that pay your bills, so please, make sure the next En primeur campaign will see much lower prices. If it doesn't, you risk damaging the whole concept of buying En Primeur.
Another, potentially even bigger danger is counterfeit. This is a real problem in China and has the potential to destroy any faith investors have in provenance. As long as we can’t be 100% sure that stock coming from Asia is genuine and has been properly stored at every point in the supply chain –something which is not currently the case – it should not be touched. In fact, assuring provenance should be given more attention as it is, even without the counterfeit issue. Encouragingly, there are more and more initiatives being taken to improve on that, which ultimately will be an enabler for Fine Wine to become a widely accepted alternative investment.
Concluding, there is a lot of uncertainty at the moment and nobody really knows what the outcome will be. Whilst above is only a snapshot of all arguments you can bring to the fore, both for and against, we believe there are strong enough reasons to conclude that the Fine Wine market is fundamentally in good shape and will soon see prices go up again. We have not quite reached the bottom, but we’re not far off. So, the coming few weeks might just present an exceptional buying opportunity for the brave.
We'd very much welcome your take on this. Let us know if you agree/disagree. Please posts your comments on our Facebook page. Go on, join the debate!