By Justin Gibbs of liv-ex.com
What a difference a year makes. In early summer 2007, when we last reported on fine wine for Fine Wine Magazine, the market was seeing large month-on-month price increases, the new Bordeaux vintage was widely viewed as strong if unspectacular and confidence was sky high. The Liv-ex 100 Fine Wine Index – the wine trade’s leading benchmark that tracks the performance of 100 of the world’s most sought after fine wines – was putting on record gains, up 11.8% in May 2007 alone.
Fast forward 16 months and the fine wine landscape looks remarkably different. The massive price rises have slowed dramatically, Bordeaux 2007 is widely viewed as the worst vintage since 1999 (at least) and the credit crunch has sent shock waves through the financial markets.
Surely the most interesting aspect of this, however, has been that the prices of the word’s finest wines have been remarkably resilient to this market turbulence. Fine wine’s performance as an investment has been little short of remarkable when compared to other assets, such as equities.
If you look at the performance of the Liv-ex 100 Fine Wine index (www.liv-ex.com) since August 2004 (table 1), we can see that during May to July 2007 the fine wine market experienced an extremely strong period of growth. Fine wine prices rose on a wave of increased demand from new entrants and new markets, with yearly returns on a number of wines as high as 100%. And then the credit crunch hit. Wine traders, much like their brethren in the city, became more cautious in their outlook and a number decided to take profit and divest of stock. The market reacted, with the Liv-ex 100 sliding slowly down in value for four moths in a row, the first time this has happened since the index was rebased at 100 in January 2004.
Since then, however, a slow and steady recovery has been apparent. Since December 2007, with new capital continuing to enter the wine market and confidence returning, the index has edged up month-after-month with the only aberration a small decrease recorded in July. By the end of March 2008, the market beat the level it had set in July 2007 and it has continued to increase since then: as of 31 August the index was 6.0 % higher than it had been at the end of July 07 and was up 9.5% for the year to date. A modest gain, perhaps, but on that looks extremely good when compared to the main stock market indices over the same period.
So what can we expect from the market over the coming year? Perhaps the most pressing issue that collectors and merchants in the US and UK are facing is currency. Since last May the value of the Sterling against the Euro has crashed – moving from 1.47 Euros to the Pound to 1.23. The US dollar has seen a similar movement over the same period, moving from 0.74 to 0.69 Dollars per Euro (half the level the Dollar reached in early 2001). This near 15% reduction in buying power on both sides of the Atlantic has had two major knock-on effects for collectors and merchants.
Firstly, any older vintages, where the stock available in the UK is low, will now have to be sourced from Europe with obvious ramifications for pricing. This is also true of younger wines where the production was low to begin with, particularly right bank châteaux. Anyone who is a keen follower of wine prices on Liv-ex or who receives the monthly cellar valuations as part of the a Liv-ex Cellar Watch package will have seen a jump in list prices for wines where the UK stock has been exhausted (or where there is a lack of willing sellers).
This trend brought the US market back into play as a supplier of stock to the UK. Wine that has gone over the Atlantic and back again is has traditionally been viewed suspiciously by the UK trade, although the price differential made the argument for shipping cases back across the Atlantic too compelling to ignore. As 2008 progressed we saw a marked increase in the availability of ex-US stock. The recent slide in the value of the pound versus the dollar may make this uneconomic as we move towards year end.
The second issue regarding currency emerged in early May and June and was of particular bother to Bordeaux-based merchants and their international partners – namely that en primeur purchases (where you buy the wine in barrel, as a future) became a lot more expensive. The currency movement meant that a 15% drop on the prices for the 2007s over the 2006s meant US and UK consumers effectively paying the same price for a vastly inferior vintage. With many of the 2006s having barely moved in price – not to mention the good value 2004s and 2001s – demand for the 2007s was thin, at best. This was particularly true in the early weeks of the campaign with some of the major names only dropping their prices by 5-10%. Thankfully, the reduction on price compared to 2006 became larger as the campaign progressed. The First Growths were reduced by as much as 25% when they finally emerged in mid June. Even this, however, was not enough to spark more than cursory interest.
One hope was that emerging markets, particularly the Far East, would take up the slack inevitably left by the drop in demand from the Anglo Saxon markets. The growing importance of Asia as a market for fine wine has been the hottest topic in fine wine circles over the past year. The decision by the Hong Kong authorities to abolish import duty on wine in Hong Kong in April (and Macau following suit in late August) together with a host of reports in the press quoting London merchants reporting booming sales pushed it to the front of the news agenda. The traditional wisdom has been that these markets buy wines to drink rather than cellar and so en primeur demand in previous years has been limited. Evidence, mostly anecdotal, has pointed to this having changed somewhat, but apart from some of the perennial Asian favourites – such as the wines from the Lafite Rothschild stable – it appears that Asian demand was relatively subdued. Not enough, certainly, to make up for the shortfall in demand from more established markets.
To demonstrate the importance of currency movements on the wine market we have converted the Liv-ex 100 into a Euro value on a month-by-month basis and then rebased it at 100 in January 2004 (graph 2) You can see that compared to the Liv-ex 100 in sterling terms the decline since last July has been steeper and the recovery took longer to take effect. Indeed, the weakness of the pound in the last week of August has more or less wiped out the gains made since New Year. Perhaps it will be the news emanating from the currency exchanges, rather than the wine critics, that will define the fine wine market as it moves into 2009.