Are You Long 2013, But Short Fine Wine?

One of the better things about being involved in the fine wine trade as a growing industry (more fine wine being produced and bought than ever before), is speculating what factors currently affect the market and which events are likely to in the future. Amusingly, even before the first half of January is over, we have already seen several disparate views on 2013, which can broadly be drawn down to one simple question – are you bullish or bearish on 2013?

Those who are bullish were buoyed this week by The Wine Investment Fund’s report predicting a positive year, with their central forecast projecting a rise of 14% on the main benchmark index. While those who are bearish are predicting a year of more stagnation and low volumes. A sentiment echoed by Goldman Sach’s Economics Research Team, made easily digestible thanks to the excellent folk at the FTAlphaville.

For those of you yet to make up your minds we offer the following breakdown:

For the Optimists: A Rebound in Asia, the End of the Fiscal Cliff, and a Look Back.

As has been mentioned elsewhere there is an apparent strong correlation between Asian stock-markets and the benchmark index. Irrespective of how strong this correlation is, it cannot be denied that the appetite for risk and the buying power of the world’s second largest economy will have a great affect on wine prices. With a new leadership in place that is adamant in keeping the status quo, whilst rebalancing their economy to avoid a hard-landing (in layman’s terms - to keep their GDP growth above 6%), and looking like it will succeed, we could well see a return to the demand levels of yesteryear as stability sets in.

Whilst it is more speculative on our part, an end to the fiscal-cliff problems that currently beset the U.S. economy would be a boon to the global economy and a boost to market sentiment generally. Admittedly this is a tad vague, but given President Obama’s success in previous negotiations we feel that this is a reason to be optimistic.

Looking back historically, with credit due to Chris Smith et al.  for their aforementioned 2013 report, fine wine is a proven asset class that has performed well in the past and while the usual economist disclaimer of past performance is no definite indicator of future events holds,  it is undeniable that  ”fine wine as an asset class remains very strong”. As Chris Smith continues: “since 1998 only four calendar years have seen negative returns to fine wine of more than 1%. 1998, following the Asian financial crisis and collapse of the hedge fund Long Term Capital Management; 2008, with the credit and banking crisis and the collapse  of Lehman Brothers; 2011 with the eurozone crisis…;and 2012″.

For Pessimists: A Weakening Pound, En Primeur, An End to Chinese Bungs, and No Sign of India.

Starting off with the least pessimistic of the four, the possibility that the Pound will weaken against the Euro over the coming year is fairly likely according to our FX-economist source. There are the few underlying problems that are, or probably will weigh on the pound rising further: including general weakness in UK economy, the fact that the UK’s external balance has deteriorated recently (that is, the current account deficit widening an overall bad sign for global competitiveness), and the remaining fiscal contraction that is bigger for the UK than for the Euro area as a whole. The effect of a GBP/EUR drop to around 1.18 explicitly is that wines purchased from the Euro-zone will be more expensive.

Although we touched on En Primeur in our last post, we didn’t highlight the changes that are happening with this centuries old system; first and foremost the exit of one of the top five First Growths, Château Latour. Given the dismal nature of last years campaign, and if this year is also a washout, will other properties follow suit and sell when and where they want to? Whilst this is less of a pressing question for 2013 specifically, it will be an interesting one to watch, as Latour is not alone in exiting the En Primeur system. Chateau d’Yquem too announced they wouldn’t sell En Primeur. Furthermore, there is talk of the 2012 Bordeaux vintage being both “heterogenous” and of “potential price decreases”. We think it’s still far too early to tell, but if the quality does not match the prices, as last year, then the demand will evaporate and we will see a re-run of 2012.

An end to Chinese bungs may seem like an odd notion for pessimists to pick up on but it’s wise not to discount it entirely. Last September there was an amusing article in the Wall Street Journal in the run up to the 18th PRC Party Congress (the change of leadership in China) about how the lack of certainty was causing a drop in luxury goods’ sales; put simply, “Sales are down because no-one knows who to bribe.” One of the key tenants of the new leadership was that they would crackdown on gaudy displays of wealth and high level corruption that is apparently rife in the country. To that end, they have already begun and it is not unreasonable to posit that with luxury bribes like Louis Vuitton hand-bags and bottles of Lafite falling out of favour, so too will the demand for them across the country.

Finally, India has long been trumpeted as the next China, in terms of growing economies yet to discover the joys of fine-wine, and although there were some positive signals last year, such as the lowering of trade tariffs, it is easy to forget that constitutionally India is still a temperance country, and federally still prohibitive in certain states. Given that the same barrier to entry, exorbitant taxation, still exists we doubt that 2013 will be the year that India takes off.

The View from the Trade: “The wine glass is filled up to the half way point.

Whether you find the above more encouraging or discouraging for the year ahead, we also offer the following small insight garnered from canvassing  the trade.  The prevailing sentiment is overall positive, with prices predicted to rise somewhere between five and ten percent. However this will not be due to any sizeable increase in demand, but a general lack of supply, with total global turnover remaining static.

2013 is set to be an interesting year whether you’re bullish or bearish, and we here at Vinetrade will continue to bring to light all the events that will affect the global fine wine market, right here in our blog.