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Decanter Magazine
Article Date: November 2008 Issue

Fine wine prices defy credit crunch - for now

Reported by: John Stimpfig
Wine Auction
I t’s now one year on since the credit crunch took its first bite out of the global economy. So how is the wine investment market coping in these challenging times? The short answer is remarkably well, particularly when compared to the more volatile FTSE 100, which is down 15% compared to this time last year. In contrast, the Liv-ex 100 index of the most traded wines is actually up by a relatively robust +6%.

It hasn't all been plain sailing over the intervening period, however. In August last year, on the back of market jitters in stocks and shares, the Index stalled for the first time after a bullish two-year period of vertiginous growth. Then, over the autumn, it fell slightly for four consecutive months as nervous investors and distressed sellers started to offload stock and take some profits. With so much wine offered for sale, this was clearly a major test for the market as prices inevitably began to soften.

In January, though, things started to look up. Several of the big UK wine merchants began to report record levels of business. Fund managers also took full advantage of the situation to buy good parcels at favourable prices. Suddenly, it seemed that strong global demand was beginning to soak up the excess stock on the market.

In fact, by February, the Liv-ex 100 was moving back to positive growth, and since then has continued to register steady monthly increases of between 1% and 2%. As a result, it's now standing at 263, having passed the 250-point barrier for the first time in April. Its year-to-date growth also looks extremely impressive, at 9.5%.
So, why has the wine market performed so well, and what is its short- to medium-term prognosis? In answer to the first question, most analysts and experts attribute wine's lack of volatility and resilience to market fundamentals. ‘It's all down to the balance of supply and demand,’ says Armit’s John Armit. ‘The increasing numbers of superrich global collectors in emerging markets like China, Russia and Brazil are simply creating more and more demand. At the same time, the supply side of blue-chip wine continues to contract. Put both of those factors together and it can only push prices for the best blue-chip wines upwards.’

Other more specific factors have also helped kickstart this year’s recovery. One was the physical arrival of the highly sought-after 2005 vintage, which sparked a flurry of trading and early price rises of more than 10% (although these have softened more recently).  Even the lackluster 2007 en primeur campaign has helped keep prices for the back vintages high. But perhaps the icing on the cake for investors was the announcement from Hong Kong that it had abolished all tax and duty on wine. Last year, Hong Kong was the 13th largest importer of Bordeaux worldwide. This year should be very different.

As a result, the principal wine funds and major auction houses remain cautiously optimistic, as prices for the very top wines continue to firm up. Business is also brisk among the big London merchants. Bordeaux Index, for example, is expecting turnover to be 50% up on last year, while in June and July, Liv-ex experienced its busiest months ever.

However, there are concerns for next year. ‘Right now, the market is looking firm, and I think wine will continue to outperform equities and many commodities over the next 12 months,’ says James Miles of Liv-ex. ‘But I don’t anticipate the levels of increase we saw from 2005-2007, when the market was at its height.’

Miles’ only real nagging concern is the future of the global economy and the ongoing fall-out from the credit crunch.’ At the back of everyone’s minds, the big question is how long the fine wine market can continue to remain immune from what is going on in the broader financial markets.’

Wine: the most precious substance of all

Investors always love to know how fine wine stacks up as an investment compared to other commodities and asset classes.

According to Will Beck, a wine fund manager and partner in Wine Asset Managers, the answer is very well indeed. ‘Since 2001, when Liv-ex began its 100 Index, wine has significantly outperformed the leading equity indices in Western markets, with an average annual return of 16%.’

Gold Bars
"Wine has outperformed gold over the past 20 years"
But that’s not all. Beck has also looked at other research going back even further. One was a study by Mahesh Kumar, which compared the annual returns of wine to those of gold and equities since 1987.

This revealed that during the past two decades, there have been no negative five-year rolling periods for wine prices, whereas there were for both gold and equities. In fact, the highest annual average returns for wine over one of these five year periods was 27%; the lowest was 3%.

No wonder Beck believes this underpins fine wine’s credentials as an attractive long-term asset.
And by combining the data with figures compiled by Robin Duthy in his Vintage Claret Index, Beck has also analysed fine wine returns since 1950. Again, the results are positive and remarkably consistent. The average gross return is 15%, and 17% if you start in 1960.

As to the future, Beck sees no fundamental shift in that long-term trend. ‘We still expect the fine wine market to continue to perform at around 15% per annum.’