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Market Report - Issue IV

Published 25th June 2012


Please Note:  This is not Atlas' most current Quarterly Market Report. The last two published Market Reports are only made available to clients who store with us. This is accessed by logging in to our website. 


Contents
I. Market Summary - 
Prospects for an Uncertain Market

Introduction, Bordeaux 2011: A Non-Event, China Pauses, Speculation and Short-termism, Opportunity, Evolving Wealth, Global Demand, Wealth Production, Investor Behaviour, Conclusion

II. 2011 Bordeaux En Primeur – Future Implications of a Failed Campaign 

III. Burgundy in Hong Kong – A Growing Theme 


I. The Market Summary 
Prospects from an Uncertain Market

Introduction

The fine wine market has continued to edge lower despite showing early year signs of stabilising. All of the leading Liv-ex indices, the most cited source of detail on market performance, have shown a fall since the beginning of the year. Whilst healthily up on a five year view, the year-on-year picture shows a drop of 13% to 26% depending on the specifics of the individual index, as evidenced below.

 

Clients are pondering this current state of play. Is it worth taking advantage of current prices? Will the market fall still further? Is this all a bubble that has well and truly burst? These are the questions  to venture.

It is clear that confidence in the fine wine market is low, which is not particularly surprising given the broader economy. The Eurozone issues continue to be a concern with many predicting painful and costly exits from the Euro for Greece with other countries possibly to follow. All of this uncertainty may affect discretionary spending; wine is often one of the more discretionary  –  rather than primary –  investments in any portfolio. It therefore may be the first to come under pressure should a client have a need to raise funds. For reasons such as this, we are witnessing any number of forced sales, each one pulling the market price down further. In such a thin market, merchants are not keen to bring stock on board for fear of falling prices. In result, prices continue to edge lower and available stock continues to increase as trade and private clients share in the same uncertainty. The much lower level of activity in investment grade wines on the Liv-ex fine wine exchange is symptomatic of this; ‘Offers’ vastly outnumber ‘Bids’.

Clients are pondering this current state of play. Is it worth taking advantage of current prices? Will the market fall still further? Is this all a bubble that has well and truly burst? These are the questions  to venture.

It is clear that confidence in the fine wine market is low, which is not particularly surprising given the broader economy. The Eurozone issues continue to be a concern with many predicting painful and costly exits from the Euro for Greece with other countries possibly to follow. All of this uncertainty may affect discretionary spending; wine is often one of the more discretionary  –  rather than primary –  investments in any portfolio. It therefore may be the first to come under pressure should a client have a need to raise funds. For reasons such as this, we are witnessing any number of forced sales, each one pulling the market price down further. In such a thin market, merchants are not keen to bring stock on board for fear of falling prices. In result, prices continue to edge lower and available stock continues to increase as trade and private clients share in the same uncertainty. The much lower level of activity in investment grade wines on the Liv-ex fine wine exchange is symptomatic of this; ‘Offers’ vastly outnumber ‘Bids’.

Bordeaux 2011: A Non-Event

In an earlier Market Report, I commented on the possibility of positive stimuli impacting the market. I mused over realistic pricing of wines in the 2011 Bordeaux campaign. Simply put, this failed to materialise. This campaign must rate as one of the most poorly-judged from a Bordeaux Château-owner’s perspective. The prices for the vast majority of wines were out of line with expectation and did not offer value to the consumer. This has suppressed the mood still further and, rather than igniting the market in back vintages, seems to have provoked an early onset of the summer doldrums. Indeed, irrespective of the quality of the 2012 vintage when released next April, the Bordelais will need to make a significant pricing gesture if they are to restore faith. And woe betides them if 2012 is another largely uninspiring vintage. As discussed in the final article of this Quarterly Report, the en primeur system is feeling the strain with the UK market viewed as the underpinning force in light of limited Chinese and sporadic American interest. No longer can China’s demand be used to persuade the UK to routinely accept allocations as, at this stage, China remains resolutely an ‘in-bottle’ rather than ‘in barrel’ market.

China Pauses

It has been widely reported that China’s economy is slowing down. Reuters ran a story on the 13th June commenting that China’s annual economic growth could drop below 7% in the second quarter. In wine terms, it is clear that China has slowed down and shipments from the UK have certainly calmed for the time being. While it is comparatively easy to source reliable statistics relating to wine volumes and values exported directly from major French regions, it is far more difficult to ascertain the trends in secondary market supply from the UK. Anecdotally, numerous London brokers have commented on a far quieter Chinese market; these are the merchants with offices and teams based in Hong Kong, for whom Asia proved to be incredibly lucrative these last few years. To lend some sense of scale, it is estimated that Hong Kong accounts for half of the turnover of three of the largest London merchants/brokers. With fatter margins on offer in a less than transparent market, Chinese sales must have made a significant contribution to their profitability over this period.

We had also previously commented on Château Lafite-Rothchild’s apparent fall from Chinese favour. This has further compounded market uncertainty. It was startlingly clear that Lafite could not continue to be pushed ever higher at the rate witnessed since 2008; few would contest this and a correction seemed inevitable. The way in which vintages have lost favour shows no rhyme or reason: good, bad or indifferent, no vintage of Lafite has survived unscathed. Endless reports concerning an alleged proliferation of fakes in China have also played a role, shaking the Chinese fixation on ‘all things Lafite.’ That said, it is rare that a brand that has been built up over such a period of time –  and one that has exhibited such strength –  is dismantled so quickly. Indeed, many wine commentators and market observers suggest that Lafite will maintain a premium over rival First Growths. For now Lafite may have had its moment in the sun, but it remains one of the most ‘liquid’ of all fine wines. Lafite continues to dominate the Asian markets, even though Chinese buyers are aware of a softer market and are understandably looking to buy at lower levels.

Speculation and Short-termism

The Lafite scenario does highlight that specific wine stocks can become over-speculated to the extent that the number of ‘end-users’ – clients armed with a corkscrew and are prepared to consume the wine – is reduced dramatically. It could be argued that this is a point in a cycle, a necessary correction to prevent prices moving too far away from a drinker’s market. Unsurprisingly, it is the younger vintages that have proven to be much more readily available in quantity in the market. It would therefore seem that there is some relative safety in mature stocks. As mentioned, the Chinese market was an ‘in-bottle’ one and so the dramatic shifts in the value of yet-to-be-bottled vintages of Lafite were always likely to be shaped by market speculation, whether private or trade-led, more than anything else.

This does beg the question of whether the number of speculators in the market will reduce, with those who were inclined to invest almost exclusively in the First Growths withdrawing from the market for the time being. A period of calm may therefore beckon if one supposes that these players had assisted in providing the lift to a speculation-driven market. It is also likely that prices will bounce around as stocks work their way through the market. Clients remaining active in the market are likely to be more seasoned investors as they have a better understanding of the market or those that have witnessed a downturn before. They are also increasingly likely to diversify their portfolio beyond the elite châteaux of Bordeaux.  It is worth stressing that fine wine was previously advocated as a five to seven year investment; expectations changed after a buoyant period post 2006, which was fuelled by greater market transparency and burgeoning international demand. It may be fair to suppose that 2013 will see a return to a steadier market unless additional stimuli exert an influence.

Opportunity

What might such stimuli be? What might it take to draw the wine market into a steady, but more upward curve? Having worked in fine wine for well over a decade, I can recall the days when I could comfortably acquire large parcels of First Growth at fair prices. I can equally recall when the market was in its pomp and I had to scrabble around speaking to négociants, brokers and merchants to cobble together even 20 cases of a particular First Growth at anything like a sensible price. Yes, there is more plentiful volume available in the market today than there was a year or two ago, but large parcels of stock are still few and far between.

Supply in itself brings opportunity; prices for specific wines have fallen to levels last seen several years ago and clients are questioning just when we might reach the bottom. Just how much further can prices fall? Distress sales certainly provide a buying opportunity, as they are relatively indiscriminate. With few merchants buying bullishly, the pressure to place stock is considerable for some market players – not least of which Bordeaux’s army of négociants – after all, they may have been hit by sluggish en primeur and stagnant Asian sales. The Bordeaux banks have already made it clear to négociants that they will not finance the lacklustre 2011 vintage so financial pressure on négociants is considerable. For this reason, there are currently very good offers on 2008s and 2009s, which have pulled prices back. The reason for this is simple: the négociants have a margin to play with on each of these vintages thanks to reasonable initial release prices (2008) and very favourable reviews from Robert Parker and the wider global trade (2009). As naïve as it might sound, they would far sooner reduce prices on vintages which still permit a margin than register a loss on the 2010 and 2011 vintages. Unfortunately, this just delays the inevitable; these two vintages will have to be discounted significantly to work through the market and it makes no difference if it happens now or later. The point here is simple: for the time being, deals abound.

Evolving Demand

The variables that render wine attractive as an asset class have not changed. There is still finite production allied to increasing global demand. Fine wine is still likely to benefit from emerging markets. In 2008, the Hong Kong market received a dramatic stimulus with the removal of prohibitive taxation and redefined the global market for fine wine. Significant reductions on imported alcohol tariffs by Indian authorities are now also likely as a result of recent negotiations on a free trade agreement between India and the European Union.  While not widely publicised, consumption of European wine in India has risen by 25% year-on-year over the last five years, according to French trade body SOPEXA, though this is from a low base. That said, there are significant hurdles to navigate as, in addition to taxes imposed directly by the Federal Government, each of India’s 28 states levy their own tax on alcohol ranging from 30% to 100%. This does, however, show that access to other emerging markets and BRIC nations – in which wealth-creation is expected to increase at a pace – is certainly on the cards.

Global Wealth

With talk of economic doom, it is hard to envisage the projection that global wealth, as measured by the number of millionaires, is set to grow dramatically by 2016. A recent study of global wealth by Credit Suisse in September 2011 was revealing for its predictions on growth.

Joe Roseman, SWAG 2011

Fine wine and wealth-creation are quite obviously correlated. Liv-ex previously ran a chart comparing the number of millionaires globally with the Liv-ex 100 index; the curves were closely matched. In a recent update to the initial article, Liv-ex drew information from Merrill Lynch’s World Wealth Report, which again echoed views held elsewhere  and commented more generally on so-called ‘investments of passion’ rather than fine wine in isolation:

The amount of money flowing into this category [investments of passion] tends to rise and fall with overall levels of wealth. However, many investments of passion are also solid financial investments and will continue to play a role in HNW portfolios, especially for HNWIs seeking investments with a low correlation to global financial markets.

Liv-ex added that the report suggested that the ‘rising number of emerging-market HNWIs is expanding the global market for investments of passion’. Considering that Chinese investors and buyers have been a driving force behind the fine wine market's growth in recent years, further wealth-creation can only be good for the overall health of the market. It seems that the number of high net worth individuals and millionaires, however they are categorised, is likely to grow substantively over the next five years.

Wealth Protection
Fine wine may also prove to be a beneficiary of wealth-protection. Interest in hard assets such as economist Joe Roseman’s SWAG assets (Silver, Wine, Art and Gold) looks set to continue. Not only have investors been made aware of the value of portfolio diversification, they are equally seeking out assets as a hedge against inflation. If the Eurozone debt default scenario plays out as many predict, it looks increasingly inevitable that governments will resort to quantitative easing (money printing) in an attempt to solve the problem. The risk of quantitative easing is that, with more cash in circulation and only a finite volume of goods for sale, inflation will eventually result. In this scenario a well-balanced portfolio of fine wine could prove not only a safe haven, but an attractive area in which to be invested. I am no economist but the constant discussion of hard assets in the media must at least be revealing a trend in investors’ thinking.

In a recent piece for FT.com, entitled Vintage Strategy Tempts Jaded Investors’, James Authers assesses areas of potential investment in the current climate and considers the merits of fine wine:

What exactly is there to invest in? Bonds are overpriced; equities are not cheap, while post-crisis regulations are prodding their biggest investors to sell them. There is a risk of true financial disaster, while the aggressively easy monetary policy of the Federal Reserve prompts fears of runaway inflation. Put like this, logic leads inexorably to hard assets – something tangible that will hold its value, and whose supply cannot be affected by central banks (Ft.com, June 2012).

Furthermore, Authers suggests that ‘[fine] wine satisfies a long list of conditions for investors’ and believes that its draw could even lead to a new bubble in the market. We may be some distance away from this, but it certainly is conceivable – particularly since we have already established that the fine wine market is driven by the spending habits of the wealthiest individuals.

Investor Behaviour

To assess the spending habits of high net worth individuals, the Barclays Wealth and Asset Management division commissioned Ledbury Research to survey 2000 of their clients to better understand their investment behaviour with regard to alternative assets such as wine. Of those surveyed, 28% had made an investment in fine wine. Interestingly, of those 28%, their wine investments only amounted to 2% of their total wealth, allowing plenty of room for growth. For many, their interest in wine was not solely driven by investment gain and many commented that they would not be looking to sell their collections unless they had doubled in value. This suggests that portfolios are, for certain investors, static for lengthy periods of time and are linked to lifestyle as much as pure investment gain. These are certainly not the clients who are today’s forced vendors. One last point of interest from this study concerned fine wine’s popularity as an alternative asset. Only in Hong Kong and Singapore did fine wine rank as one of the top three targets for alternative investment, suggesting that wine is still, despite considerable coverage over the last decade, an unexplored by many investors elsewhere.

Conclusion

It is clear that fine wine remains attractively positioned and may yet draw more of the limelight.  A new wine culture in China is likely to lead to changes in taste and direction and inevitably fluctuations and corrections. But the scale of the Chinese market will continue to be a dominating theme over time. In 2011, for example, it is estimated that half of Bordeaux exports were shipped to China and Hong Kong alone and the Bordeaux Wine Council confirms figures at 342 million euros. Furthermore, the Chinese are looking to extend their physical presence in Bordeaux. While it has been widely documented that a number of châteaux have been acquired by Chinese companies/ investors over the last few years, just recently one of China’s largest food groups announced that it is buying 70% of Diva Bordeaux, a large, French independent wine broker. This suggests that the Chinese are not content with involvement solely in Bordeaux production, but are looking for influence within the distribution field as well (Gibb, Wine-Searcher.com, June 2012).

Leaving China aside, demand from other BRIC countries where removal of regulation and taxation may lead to more open markets will also lend vigour to the market in time. It is no coincidence that future growth in the wine market is intrinsically linked to those economies where wealth is widely predicted to grow exponentially over the next five years. Who would have thought we would have a Brazilian wine fund in operation investing in fine French wines in 2011/2012? And yet we do.

Judging the exact moment when the market might turn is impossible, but the dam of interest that has been building these last few months must break soon. The year on year comparisons of the Liv-ex indices may make for grim reading, but the performance over a five year period still holds considerable interest. Many merchants find themselves in a similar circumstance with a good number of wealthy, seasoned investors waiting to re-enter the market. When this does eventually happen, merchants will also feel inclined to re-load their books and will be able to more easily assess demand and direction. Market moves may be more measured, more circumspect, but they may also be more sustainable. I do not envisage the dramatic surge in hard assets that Authers’ outlines on FT.com. That said, I do think the market is interestingly poised and believe that selective opportunities will present themselves in the next six to nine months, which will reward investors who adopt a pragmatic five-to-seven year approach. 

II. 2011 Bordeaux En Primeur – Future Implications of a Failed Campaign

It has been an interesting campaign, although not from a revenue perspective. While this was no surprise to us, it may have interesting implications on the future of en primeur, given the poor sell-through levels of the great and the good.

In its pomp, the market functioned on a strict allocation basis. Merchants received allocations of a given wine relative to their purchase from the previous year, after having taken the current vintage yield into consideration.  If the volumes produced were lower, any allocation would be scaled back by a similar percentage. This system worked well for Bordeaux as their message to merchants was simple: build your on-going positions when you can and accept them each year or you will re-join at the back of the queue.

Many UK merchants played this game, never daring to step out of line. The rules, however, do not apply to all.  I can recall moments of disquiet when the US market stepped back into the fray for the 2003 vintage, after leaving 2002 almost entirely alone. In 2009, the Asian market became involved with en primeur – albeit in a relatively tentative manner – and was the cause for consternation for many UK merchants, as they felt that their allocations were under pressure from the demands of emerging markets. It later became clear that the Chinese prefer to take stock only when it is physically available and so various Chinese merchants have negotiated down commitments they made for the 2010 Bordeaux last year, delayed payment until shipment is made or, in some cases, reneged on entire deals. Despite this, it is clear that négociants – and possibly to some extent Châteaux – will welcome Asian buyers back in with open arms when these nascent en primeur markets take shape and mature.

Now that the 2011 vintage has been and gone, it is clear that the négociants’ focus was firmly transfixed on UK merchants, as it was the UK market which underwrote the last two vintages. The Bordelais were hoping that they could move stock in the UK’s direction, with little US and non-existent Asian interest in the vintage. Allocations were irrelevant: everything was on offer to everyone; such was the lowly level of demand. Holding onto positions should have been of little concern to the UK wine buyer, as access will have to be granted next year irrespective of support of the vintage. With so little volume actually trading through, next year cannot be based on the preceding vintage and the focus will remain firmly fixed on UK sentiment. This is not a new phenomenon in Bordeaux en primeur. During the 2007 campaign, the trade felt release prices were too high yet négociants played the allocation card. Considering the direction in which the market was moving and the insatiable appetite for good en primeur vintages, many merchants opted to swallow the bitter pill and had unsold 2007s on their books for a year or two before Asia came to the rescue. Because those conditions did not surround the 2011 vintage, négociants could plead for support for the vintage but they could not insist on it.

Whether the en primeur system has irrevocably changed is a topic of heated debate. The 2012 campaign is likely to be an equally interesting one, as there is much goodwill to be won back by Bordeaux and the upper hand is likely to remain with the purchasing merchants. Consider also that Château Latour has stepped out of the en primeur arena from 2013; this age-old and hitherto efficient system of trading young wines from Bordeaux may continue to feel the strain.

 

III. Burgundy in Hong Kong – A growing theme

 

In one previous Market Report, we commented on Chinese interest in the wines of Burgundy and the apparent broadening of the market. The phenomenon has, in recent months, been explored in more depth. In a recent article, Burgundy Boom in Hong Kong (winesearcher.com), journalist Rebecca Gibb analysed the export volumes of Burgundy and examined the emerging consumption trends within this ever-important market.

The chart below reveals that Burgundy exports to Hong Kong have increased fivefold since the abolition of wine taxes in 2008. In itself this may not be such a surprising statistic, after all this growth has developed from a comparatively low base. What is interesting, however, is the volume of white Burgundy that is being shipped to the new wine metropolis exceeds that of red.

As a category, the figures suggest that Burgundy exports have risen 111% by value and 55% by volume over the last year.

Evolution of Burgundy wine exports to Hong Kong by color
Wine-searcher.com June 2012

In the article the BIVB (Bureau Interprofessionel des Vins Bourgognes) talk of a  ‘surge in sales of white wine from Burgundy, particularly from Chablis.’ It would seem that the pairing of white wine to local cuisine is seen to favour the whites of Burgundy, though a resident MW close to the market added that she did not think that people were considering wine and food pairing that carefully yet, though she stated that there was significant potential for Chablis to work its way into the market.

One final point which is worthy of note; these figures do not represent shipments of Burgundy to Hong Kong from anywhere other than the region itself, so the surge in secondary market activity, which is much more difficult to track, is not included in these numbers. When one considers, that in certain recent years, a greater value of Bordeaux was traded to Hong Kong from the UK than from France itself, the trend towards broader wine tastes perhaps spearheaded by Burgundy, might be far greater than we estimate currently. 


Should you have any questions or comments on this Market Report, please do not hesitate to contact any member of the Atlas team on +44 (0) 20 3017 2299, info@atlasfinewines.com or by submitting the form below. 

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