In the latest in our series we look at the recent history of Fine Wine Markets.
For anyone who has yet to invest with us or for those who need a refresher we hope you enjoy the below. In terms of wine investment, a recent history of the Fine Wine Market can be put into three categories;
- Pre-90s (A Time of Less),
- 1995 to 2009 (Wine Boom & Bust),
- 2009 Onward (Today’s Market):
Pre-90s – A Time of Less: A recap of the non-existence of an investment market for wine.
One easy thing to forget in today’s globalised world is the sheer availability of goods. Specifically with regards to wine, today one can buy wine from just about any wine producing country in the world, but it wasn’t too long ago that quality, and certainly fine wine, only came from the old-world. To wit there wasn’t an investment market per-se, certainly not in the way that there is today. Moreover there was no global market and certainly little buying outside of Europe or the United States. When buying Fine Wine, one could buy several cases of a particular vintage and then sell off a couple to pay for the other case or put the funds towards school-fees, holidays and the like; that was the sum of wine as an investment.
Economically the market was very opaque and illiquid. In addition to far fewer wines available, there were also far fewer merchants on the scene, and prices generally rose slowly as supply dropped. Often, the only chance to buy back vintages was at the time of newly released ones, when the merchant might have a tiny allocation of an older year from the Chateaux/Domaine. Unlike today, the auctions were dominated by merchants, as they were one of the few ways to access wine outside of the original producers.
With the end of the Cold-War and a new global prosperity taking hold, Fine Wine prices were poised to rise. Combined with a rise in the quality of wine being produced in places like Bordeaux and Burgundy, as well as a staggering climb in Global GDP from $1.35Trillion in 1960 to $29.99Trillion in 1995, it’s almost small wonder prices didn’t rise sooner.
1995-2009 – Boom & Bust: A rise in wine markets, prices, quality and availability.
The Boom: Between the mid-90s and 2009, wine investment outperformed all expectations: throughout this period Bordeaux wines yielded returns of around 200%; Burgundy also showed returns of around 200%, while investments in Rhone Valley wines yielded returns of around 300% over the same period. In their academic paper, Raise your Glass: Wine Investments and the Financial Crisis (2010), Masset and Weisskopf showed that auction prices of wines grew steadily over the period 1998-2005, while indices of companies listed on the US Stock Exchange experienced steep drops in 2001 and 2003. In their analysis, auction prices of fine wines in the US continued to grow throughout the aftermath of the terrorist attacks in New York in 2001 and the burst of the dot-com bubble. Masset and Weisskopf called the period from 2005 to 2008 “the golden age for wine”, as US auction-house prices doubled across the board. The arrival of Asia on the Fine Wine scene, and more specifically, Chinese thirst for Bordeaux First Growths, continued to lead the investment field for most of these ten years, although the appeal of Burgundy and Rhone wines continued to dent the Bordeaux’s dominance:
- Returns for Burgundy were up 140%, while
- Rhone Valley wines increased in value by 55% and,
- Bordeaux prices jumped 63%.
The Bust: But by the end of 2008, the ignoble rot was starting to set in, due in no small part to the sub-prime mortgage/credit bubble. Bordeaux and Rhone wines dropped less sharply in price than Burgundy, where auction prices in the US fell by 39%, but nonetheless still shed 15% of their value on the back of the demise of Lehman Brothers. The Bordeaux-led Liv-Ex Fine Wine 100 index dropped nearly 20% in a precipitous slide in October 2008.
- Wine prices rose on the back of the arrival of new and emerging markets, especially China,
- More wines and a greater global infrastructure increased liquidity,
- An increase in merchants to meet the burgeoning demand resulted in greater transparency.
2009 Onward – Today’s Market: (un)Fortunately prices don’t continually rise forever.
Between July 2009 and July 2011 the market rallied, thanks to the global markets stabilisation effects of April’s G20 Summit. It looked as if the Liv-ex Fine Wine 100 would just keep rising after gaining 38% over its previous high, but then it dropped again from July 2011. To date, the index has currently lost over 25% of its previous peak value and is still falling.
Why the fall in prices? There are a number of factors that have destabilised the wine market of late:
- Decreasing demand for some wines in the Far East,
- Coupled with an over-supply of stock.
- Poor handling of the En Primeur campaigns in 2011 and 2012,
- Cash-poor, distressed investors needing to liquidate their portfolios,
- Tied to the untimely termination of several Investment funds,
- And ultimately, the necessary correction to a Bordeaux Bubble that had begun to get out of hand.
Summary: Unless there is a return to the global GDP of the 1970s we see no reason why the trends and markets that have emerged over the past 20 years don’t continue. Certainly we suspect that as the market gains in liquidity and transparency and is increasingly tied to global markets that there won’t be a further rise in volatility. There is still demand for Bordeaux and other wines continue to rise in price. We look forward to addressing this and the above factors that caused the recent fall in prices in the next post in our series: Emerging Markets and Wine Prices.