Published 31st January 2012
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I. The Market Summary
We anticipated a further fall in the market over this quarter and it came to pass. In last quarter’s report we suggested the Liv-ex 100 would fall to just below 300 by this stage. In fact, it fell a touch further to close last month at 286, representing a monthly drop of just short of 4%. After such a fall we speculated that some form of stabilisation would occur, and it appears that we are nearing that stage (See below).
It has been First Growth values that have been hit the most. The usual jostling for position by UK merchants, all keen to offer wines at the lowest market price, coupled with uncertainty emanating from private clients, has seemingly pulled the market down and has only recently shown signs of abating. Distressed sales continue to appear sporadically as certain clients choose to cash in their chips on specific wines and vintages, but activity is slowly returning with some firming up of price.
Such hefty falls in values have led to the inevitable, million dollar question: when do the values of First Growths look compelling enough for buyers to re-enter the market? This is a question that both trade buyers and private clients have been grappling with for the last four to six weeks and consensus across our client-base suggests that we are close to that level. Tentative moves to take advantage of lowly priced Cru Classé have been made over the last few months by numerous clients, but the Eurozone woes cast a large shadow over the market and prevent many from getting heavily involved.
Take a look at the Liv-ex 50 below which solely tracks the values of the five First Growths in the last ten ‘shipped’ vintages (i.e. up to and including 2008). Since the Christmas break this Index has shown signs of levelling out. Further good news is made apparent in the volumes traded on Liv-ex; the percentage of trade commanded by the First Growths recovered by over 10% and returned to levels we last saw in early October. December’s overall volume of trade was an all-time low for Liv-ex, and yet January represented the second highest volume of trade since its inception!
Picking the bottom of the market is never easy. Within all the commentary there is of course considerable generalisation; some wines and vintages have carried on regardless, perhaps viewed as safe havens or stores of value in uncertain times. As commented in October’s quarterly report, Second Growths and wines of equivalent status have proven attractive purchases over recent months, as have the wines of Domaine de la Romanee-Conti and various iconic Pomerol.
Reasons to be cheerful? ‘A little drop of claret and anything that rocks!’
The fine wine market has endured a correction on the back of all that has occurred in the economy these last 12 months. 2011 was almost a year of two halves; the first half was simply ‘business as usual’, the second was characterised by price falls. It was as if the release of the 2010s at their eye-watering levels was just a bridge too far. In terms of a mid to long-term view such a correction should result in more measured and sustainable growth – even the most hardened speculator would not believe that Lafite’s value could have continued to spiral even higher at such a frantic rate.
As mentioned above, for the market to stabilise the First Growths need to hit levels that start to rekindle interest in buyers; it is still the Firsts that dominate the market. There is some evidence to suggest this is happening (see Liv-ex 50 above). Aside from the Liv-ex 50, the Liv-ex Claret Chip Index, a broader index, has inched ahead for the first time since July.
The situation is similar to the recession of 2008 after Lehman’s collapsed, and the correction we are currently experiencing is of a similar magnitude. Back then, First Growth prices had fallen dramatically – notably for the 2005s – only for them to recover substantially in the following months on the back of various pieces of encouraging news.
For the market to begin a recovery, we need a catalyst. Perhaps this will take the form of a Parker review. American critic Robert Parker has made no efforts to hide his views of the 2009 vintage in Bordeaux. If anything, Parker’s praise has inched higher, following his ‘Magical 20’ tasting in Hong Kong. The trade anticipates some heady scores when he releases his definitive scores for these wines in February; Parker is due to release his in-bottle scores for the 2009s in the very next issue of his journal. Historically, upgraded or ‘inked-in’ scores at lofty levels have provided a good stimulus to the market. Few would bet against a favourable – if not emphatic – report this time around.
The catalyst could also take the form of an en primeur campaign. Should Bordeaux 2011s be released at sensible prices in May and June, it could be just the tonic that the market needs. This period is linked to sizeable volumes of trade, not just in the current releases but in back vintages too, and a release at affordable levels could certainly reawaken interest. We saw the exact same occur in 2009 when the 2008s were released. At first, the wine buying public seemed disinterested, but as prices started to emerge at startlingly realistic levels, more clients were encouraged back into the market. Could the Bordelais heed the comments from the trade? It will be an interesting campaign to watch. As usual, we will be across in Bordeaux in early April to taste the wines.
Or the catalyst could simply be Chinese buyers returning to the market. Much has been made of the Chinese demand for Bordeaux easing over the last few months on account of oversupply, the hefty prices they have been paying and concerns over economic growth. With a recent easing of Chinese monetary policy, should growth be stimulated, this would have to be welcome news for even the wine market. So the inevitable question is how can this be tracked?
Tracking details or statistics relating to patterns of consumption or export volumes is far more difficult than it sounds. The regional bodies that are in charge of the promotion of their wines on all major export market provide some basic data, but one has to acknowledge that such statistics are skewed by lower stream offerings. The following graph was produced by the Commité Interprofessional des Vins de Bordeaux and reveals the dramatic growth in export volumes of Bordeaux to China over recent years.
One interesting fact that should be considered is that, to date, we have not witnessed any real return of stock from Asia. The UK has seen stocks return from the US for some time; with US import strip labels leading to concerns over a wine’s provenance to such an extent that a 10-15% discount to the value of pristine UK stock is often anticipated. With regard to Asia, many trade buyers would treat stock that had returned from this destination with far greater suspicion given the absence of professional storage facilities available in this market. Wine that has clocked up air miles rarely holds it value and, given the potential impact on the quality of the contents, nor should it. This therefore means that stocks traded and shipped to China are given a one-way ticket and are ‘removed’ from the reach of the UK fine wine market.
While consumption statistics are certainly of interest in understanding underlying long-term trends, export data is also incredibly revealing – when it can be found. Provided export volumes do not fall too far, the pressure on mint condition European stocks will remain intact.
The potential of the Chinese market remains high irrespective of the various articles that one might have read in a multitude of journals and papers. It was reported that per capita wine consumption in China had grown from 500ml in 2009 to 950ml in 2010, which is far lower than the global average. A US-based consulting firm recently released statistics that suggested that wine sales in China exceeded 53 billion yuan in 2009 as a result of growth in value and volume of in excess of 15% per annum over the last few years.
According to the regional body, the Bureau Interprofessionel des Vins de Bourgogne, the upward trend in Burgundian exports to Asia showed increases of 81% in volume and 103% in value to China from January to August 2011. The deputy president of the BIVB commented that “Asia represents 20% of the export market for Burgundy wines. Hong-Kong and China, combined, may become the 6th largest market for Burgundy.” It should be stressed that statistics such as these relate as much to Mâcon-Villages as much as they might to Domaine de la Romanée-Conti.
The rising interest in and value of Burgundy has certainly caught the headlines and this interest is usually ascribed to the Chinese market. Recent auctions have achieved eye-watering sums for the wines of Domaine de la Romanée-Conti and leading wines from various other, small production, high prestige Burgundian domaines. Word has it that one Chinese bidder was actively bidding for all ‘Vieilles Vignes’ cuvées that appeared as he mistakenly believed ‘Vieilles Vignes’ to be a producer, rather than a description for a wine produced from a parcel of old vines and a term that can be employed by any producer! It seems that many want to cash in on the action related to high brow Burgundy. Indeed I have even received offers of Domaine de la Romanée-Conti from Bordeaux négoçiants, which is a very unusual development.
While it appears that the activity surrounding Burgundy is heating up, there is a danger of reports becoming exaggerated. In Asia, Burgundy failed to register on the radar until recently, so rising interest starts from a low base. Consider, for example, the percentages of trade on the Liv-ex exchange dictated by the various regions below across the last five years. Note that the average in 2011 falls short of the volume of trade achieved in 2007, 2008 and 2009. Clearly, Liv-ex is only one route to market, but nonetheless the data below is quite revealing.
There is an added impetus to the market in fine Burgundy however, though sceptically one might consider that it was driven by UK-based speculation, from either private clients or wine funds, rather than by the Chinese themselves. Presently, we are told that there is an insatiable demand for the great and good of Burgundy and that, unlike the First Growths of Bordeaux, which until recently enjoyed the lion’s share of the limelight, are underpinned by low production volumes. Insatiable demand has a habit of fading out just as it appears to have done in the case of Lafite-Rothschild. The question to clients who have amassed great collections of Burgundy at the advantageous prices of yesteryear has to be: when is hot too hot? Should clients be selling into a rising market now or holding? There are arguments both ways which clearly relate to prospects for individual wines and vintages, but trading out of Burgundy in years gone by has always underlined the fact that list prices might not always be realisable. Bids are often at substantially lower levels than expected and there may be far fewer bidders in the market than one might be led to expect. In short, the production levels of Burgundy do not necessarily add to its liquidity and prices that do reach the stratosphere hold the interest of an increasingly rarefied audience.
In the last Quarterly Report we commented that the future health of the Chinese economy may well hold the key to the speed at which the wine market bounces back. There are signs that the market is steadying and trading levels are certainly up, but we envisage deals being struck below market prices sporadically across the next few months as different pressures are felt in the market. Merchants who once sat back on their laurels – safe in the knowledge that the Hong Kong offices were placing stocks at generous margins – will not be sitting so comfortably. China has taken a breather, perhaps on account of oversupply these last couple of years. It is our belief that it is only a matter of time until its appetite returns, as the fundamentals have not changed.
Until then, prices at which leading wines may be acquired might well be the lowest entry point that we will witness for some time. The significant year on year price jumps that we gradually grew accustomed to have eased, though there are still notable success stories. Perhaps a portfolio might take longer to show its value – in line with the age old 5-7 years rule that was previously employed in the industry. As ever, we are watching market developments, focusing on quality and looking to secure interesting and well-priced parcels for our clients.
In advance of the review of 2009 Bordeaux in bottle by Robert Parker, it could well be an opportune moment to revisit the topic of this great vintage. This may well form an on-going topic this month.
If you wish to discuss the 2009s, your own collection or any of the information in this article, please do not hesitate to contact us.
Simon Larkin MW
PS. It may worry a few of you that I still remember the line from ‘Ian Dury and the Blockheads’ Reasons to be cheerful!
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