The Future of Wine Investment

As we’ve mentioned previously in this series, the history of wine investment is a relatively recent one, and predicting where the market might go, or even extrapolating where it’s come from with a view to future events is quite difficult. In attempting to see what the future of wine investment might be we need to consider the following:

A vineyard in Burgundy

A vineyard in Burgundy. Despite the Bordeaux crash that started in 2011, Burgundy prices have continued to rise.

Where we are right now – the state of the wine market

Currently the wine market is down from its unbelievable heights of 2011 where a case of Lafite 2008 would’ve set you back £13,000, a sizeable increase from two years earlier at £3,000. Many see this as a necessary correction of a rampant price bubble that had been blown out of all reasonable proportion, others as the waning demand from the Far East. Yet, to be specific, by wine market here we’re talking the more heavily Bordeaux weighted price indexes; Burgundy, Rhone wines, Champagne as well as new world cult wines have all gained in price, above the year on year vintage price increases, as the popularity for Bordeaux has apparently diminished. Whether this is down to a broadening of tastes in emerging markets, the knock on effect of the Euro-zone Crisis, or an over availability of stock in places like Hong Kong, it is hard to say exactly. What we can say for sure is that Bordeaux prices have dropped off: a case of Haut Brion 1998 from a reputable UK merchant cost £2850 in 2008, £3400 in 2010, £4600 in 2011 and today £3100.

How Wine Investment has performed to date – Bordeaux beats Spanish Bonds

Depending upon how bullish or position the person you’re speaking to about wine investment is in, you’ll get wildly different answers. On researching this post we’ve seen some utterly shameless graphs that depict a straight line to the sky of supposed returns on wine investment, or the, less obviously misleading, example of the Bordeaux-weighted index pre 2011 crash; the implication being that everything is still rosy in the wine investment market. Over the past 5 years, classed growth Bordeaux has risen by just under 15%, considering the state of global markets on the back of the financial crisis, is not a bad return. However, given that most classed growth Bordeaux does not physically mature in only 5 years, a longer term picture of say 10 to 15 years would be a better period to consider the returns.

The New Players moving the market – Wine Funds

One aspect of Wine Investment that we have yet to touch on, and probably deserve a post of their own, are the so called Wine Funds. These are companies and investment vehicles, set up with the sole purpose of  investing in fine wine with an objective of steady, high capital growth. Unlike the traditional merchant, who would offer wine as an object to be consumed, Wine Funds are solely interested in the capital gains of wine as an alternative investment, and such are regulated by the FSA. The net effect of these funds appearing on the scene has been twofold, firstly to increase the amount of capital in the fine wine markets, and secondly to provide liquidity, in terms of volume of trade. To clarify, as often is the case with investment vehicles a certain expiration date is mandatory on the wines. The long and short of this is that at times the fund has to sell the wines, unlike a merchant, even if it is at a loss; some closed funds only run for 5 years.

What Might Happen – Grexit, BRICs and other economic lingo

Currently you could argue that the volatility in global markets is due to an over-riding uncertainty, and that once we have an answer, or a base, or some kind of clue as to what’ll happen next, or even whether Greece will leave the Eurozone, then the markets will stabilise and prices rise, prosperity will boom etc. etc.. With regards to fine wine the same is certainly true – the prices of classed Bordeaux, specifically the First Growths, has been tumbling since mid last year and with no one actively calling the bottom and buying en mass, the prices keep falling. That is not to say that no one is buying however, new wine funds are continuing to appear on the scene and with their surge in demand, prices on certain wines will only rise.

There is also the case of the other emerging markets, particularly in the so called BRIC economies. China, one could argue, is now well established on the scene, with hopes that both Brazil and India will follow suit in the coming decade and demand for luxury items like fine wine will rise.

Finally, we should consider not just emerging economies but high net worth individuals (HNWIs). A report published on June 19th by Cap Gemini and RBC Wealth Management found that the number of (HNWIs) continues to rise, especially in the Far East. “The 16th annual World Wealth Report finds that the number of HNWIs in Asia-Pacific expanded 1.6 percent to 3.37 million in 2011, making Asia-Pacific the largest HNWI region for the first time, surpassing North America’s HNWI population of 3.35 million. North America remained the largest region for HNWI wealth at US$11.4 trillion compared to US$10.7 trillion in the Asia-Pacific region”.

SWAG – Safe assets? Silver, Wine, Art and Gold

Joe Roseman, a former headfund manager, has recently coined the term SWAG, a collective acronym for physical assests that all have the properties of being tangible, finite and less correlated with currency and stock market values. “I have read the views of many economists who tend to class SWAG-style assets as not ‘proper’ assets because they  have no income stream,” said Roseman. “ Such thinking is, actually, tremendously naïve.  To define an asset as needing an income stream fails to appreciate the very essence of an asset.” Roseman goes on to say that “SWAG assets (that) share a similar asset DNA. Assets that have risen in price materially over the last decade notwithstanding the bursting of the internet bubble, the subsequent recession, the credit crisis, the deepest recession in living memory and now the European sovereign debt crisis. Every investor needs to explore the benefits of having some SWAG assets as a part of their savings.”

The Future – Assumptions and Summary

The old economist’s get out of jail free card “past performance is not an indicator of future results” is maybe the safest, but certainly not the soundest of truisms for Wine Investors. Wine prices have come off the more renowned Bordeaux names, but that is more likely due to a surge in demand and a change in the model of Bordeaux-trading that had previously existed. However that is not to say that investing in Bordeaux is a loss maker, quite the contrary, it is investing in the “right wines” that is key. In summary:

  • Assuming there is a conclusion to the Eurozone crisis, we see prices will rise again.
  • As demand for the best wine increases globally, so too will the prices.
  • With prices seeming to rise, more people will want to be in on the action and we suspect more funds will emerge.
  • That is not to say that one can just “buy Bordeaux” and sit back, ill-researched investors will likely get burnt.
  • To this end Vinetrade will be commenting on three wines on a weekly basis with a view to buy, sell or hold.
  • With the growth of the end market, and the availability of some aggressively priced investment wines, fine wine investment remains a solid option for the diversified investor.
  • Ultimately we believe that wine investment is not a short-term investment and that a diversified selection of wines is essential to the prudent investor.