Published 22nd October 2011
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I. The Market Summary
III. A Comment on Second Growths
I. The Market Summary
Over the last three months, the fine wine market has proven that it is not immune to the global economic situation. As expected, the slide has not been that dramatic; the Liv-ex indices have shown to be less volatile than equity markets. Unsurprisingly, the wines that have shown the biggest drops are those which were fuelled by overambitious speculation. The 2008 vintages of Châteaux Lafite-Rothschild and Mouton-Rothschild have lost significant ground over this period, although clients who bought these in the early stages of the 2008 en primeur campaign will still register a handsome profit. Such ‘corrections’ cast some doubt over the seemingly insatiable demand from the Far East for all things Lafite as well as the symbolism of the ‘8’ vintage. Perhaps this sentiment was over-exaggerated by speculative merchants to the extent that everyone bought in and perpetuated the myth.
The market for First Growths has been sliding since the end of July. The Liv-ex Fine Wine 50 Index, which is a measure of the last ten physical vintages of the five First Growths, has fallen from 440 on the 21st July to finally show signs of levelling at just over 370 in recent days. The broader, Liv-ex 100 Index, which represents the 100 most traded wines as estimated by Liv-ex, has fallen from a high of 355 in July to just over 322 at the end of September. We anticipate that it will fall to 300 before it steadies and shows signs of recovery. A drop of this magnitude would mirror the fall witnessed late in 2008 after the Lehman collapse.
The various indices have been skewed by hefty falls in particular vintages of the First Growths. Certain five star vintages have weathered the storm better than others and the value of mature stock with more restricted supply has again shown its worth with very few wines pre-1996 showing signs of weakening. Another bolt-hole category that seems less affected by recent pressure is that of leading Right Bank wines. This is no doubt bolstered by the considerably lower production levels – in much the same way as mature Left Bank vintages seem to benefit from depletion of stock through consumption.
Prices have recently been suppressed further as a result of distress sales. Even Atlas has had a number of low tracking bids on Liv-ex hit at levels that we have not seen in years. As a low stockholding model we are happy to take advantage of such opportunities. It is to be expected that the First Growths will be the early targets for ‘liquidation’ in such circumstances and there is always a market for them, at a price. Additionally, a more substantial value is tied up in a smaller number of cases; realising the cash is thus easier.
Levels do appear to be stabilising and the value of bids on Liv-ex is still substantial – we are not witnessing the same scenario as we did in late 2008 when all the buyers seemed to disappear entirely. Anecdotally, Liv-ex has commented that at that time the value of bids fell by 75 per cent; this time around they have fallen by just 20 per cent. It is as if everyone has simply lowered their buy-in price but maintained interest in the same targets. Interestingly, this week, Liv-ex reported the first weekly gain for Lafite in three months (as measured by their Claret Chip Index). Some significant bids have started to appear which might suggest that buyers view the ‘correction’ as having taken place already. Our view is that there has to be a level at which Lafite again becomes attractive as there is little doubt, as Lisa Perrotti-Brown MW, suggests below, that in the Far East Château Lafite will remain ‘the best of the best’. The 2008 vintage has attracted substantial bids on Liv-ex at just under £9,000 per 12, suggesting that purchasing merchants will be selling it on to private clients at, or around, the £10,000 per case mark. Any concern that the love affair with Lafite has ended should be allayed by the following graph, which shows a synchronised fall in price by all the First Growths in Liv-ex’s Claret Chip Index!
On wine critic Robert Parker’s website, a former colleague from the MW course, Lisa Perrotti-Brown MW, based in Hong Kong, has made some interesting comments concerning the Chinese market, drawing attention to how little wine is actually imported and alluding to a growing interest among the middle/ aspirational classes.
‘During my visit to Shanghai in August 2011, I was amazed at just how quickly the city is developing its thirst for wine. Of course there has been a lot of global reporting regarding the growth in China’s wine imports, mainly focused at the lowest / bulk end and upper price points with not much talk of action in the mid-range. But its massive population of 20+ million, burgeoning middle class and taste for luxury render Shanghai in particular something of a must-target prospective market for wine producers throughout the world. Consequently there is a better range of interesting, good quality imported wines available at all prices in this city than ever before………..China’s interest in wine remains overwhelmingly for reds (although personal experience suggests that many of the Shanghai locals prefer the taste of whites). That Chateau Lafite continues to hold onto its title as “the best of the best” in the eyes of aspiring Chinese collectors remains a curious fascination to outsiders with many hopeful wineries looking to make their flagships the next lucratively placed Lafite.’
III. A Comment on Second Growths
At Atlas, our advice to clients early this year was to reduce reliance on First Growths and look to broaden portfolios to encompass wines of Second Growth level or equivalent. We remain convinced that there is significant pressure on wines that are more affordable to a broader base of consumers, not just in one market but globally. Many clients in the UK and overseas who buy to drink have been priced out of the First Growth market. Meanwhile only 5 per cent of wine consumed in China is imported. If the Far Eastern market is believed to be a nascent wine culture then it is not unreasonable to assume that interest will broaden from a purely brand-led approach.
In order to shed some light on the performance of this band of recommended Second Growths (and wines of equivalent quality) we drew up a simple index based on the Liv-ex Average List Price of January 2010. Against this we compared an index of 35 vintages of First Growths from strong, well-rated vintages in order to show how each set had fared across the last six months. The indices show clear and consistent interest in Second Growths, not registering any fall this year up until August. In comparison the First Growths are shown to have been edging along since March until a fall began in June. How much further either index will fall remains to be seen, but one can see the benefit of broadening focus to include Second Growths.
The first chart shows the value over one year.
The second chart plots the performance over a two year window, and while you can see a dramatic uplift around May and June with regard to the First Growths, the Seconds have shown a steady increase but in perhaps a more measured manner. The Second Growths are not the subject of such a concentration of speculative purchases.
We can provide details of the wines included in either of these indices upon request.
It would seem that the recent drive towards what Joe Roseman humorously termed 'S.W.A.G. Assets’ in a recent Investment Week article is set to continue. Physical assets such as silver, wine , art and gold hold plenty of interest for investors looking to diversify their portfolio particularly in light of Eurozone concerns, stock market volatility and quantitative easing.
Many of our clients have commented that they are watching the market closely and waiting for the right moment to buy. Distress value might hang around for a while but, historically, falls in the fine wine market have been relatively short and sharp. In 2008 the fall lasted just three months before some form of stability returned. To many investors the principle drivers remain intact, namely new markets applying pressure to already constrained supply just as before. The future direction of the Chinese economy may potentially hold the key and it is clearly going to be beneficial if the aspirational classes in China continue to feel a degree of growing wealth.
It is not just private client activity that is likely to re-awaken. It is rumoured that one leading London fine wine company has been operating at a third of its normal stock level for most of this year and that they are now poised to re-load their inventory, taking advantage of lower entry prices.
Additionally, the emergence of a number of new wine funds has started to raise interest. In late August the Financial Times reported that China was about to witness its first wine investment fund. The Dinghong Fund planned to raise $156 million, equivalent to just under £100 million, for deployment from September onwards. The sum may not sound so significant when compared to an investment in equities, but in fine wine it is sizeable. Another new fund was recently established in Brasil, further demonstrating that such vehicles are no longer limited solely to the UK or even Europe.
It would appear that there is plenty of new money that now considers fine wine as an alternative investment. In the current climate those brave enough to get involved have a very good chance of acquiring desirable vintages and wines at comparatively low levels. Could these be the lowest levels we witness for several years? Again, the answers will become clear in time.
In the meantime, at Atlas we remain committed to picking up good parcels of selected wines that we believe offer value to clients, whether this be First Growths at below market norms, or Second Growths at attractive levels. Our advice is very much about broadening portfolios since we view the opportunities as mid-term based on our view of new markets and evolving tastes. This broadening still only concerns approximately 20 châteaux in Bordeaux together with a couple of estates in Burgundy and so, relative to production of fine wine, it is still incredibly narrow.
To discuss opportunities that currently exist or your plans for your collection, please do not hesitate to contact us. We look forward to being of assistance and trust this report has provided insight into the current state of the fine wine market.
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, firstname.lastname@example.org or by submitting the form below.