Felicitations
Felicitations at the dawn of 2016!
It is at this time of year that everyone prognosticates about what the year will bring for the fine wine investments market. So, rather than doing that, and in the absence of a crystal ball, we thought it would be better just to remind everyone that from an investment perspective, the turn of one year into the next changes absolutely nothing!
From a calendar perspective, obviously, it brings future events closer, and as has become traditional in the fine wine investment market, early January brings two things into sharper focus: Chinese New Year; and the next en Primeur campaign.
It has become axiomatic in recent times to attribute much of the correction in Bordeaux wine prices over the last four years to the drastic alteration in patterns of demand from mainland China. As a result, the market looks out for indications of interest in the run-up to Chinese New Year, interest which can usually be seen from around November of the prior year.
Depressed prices in the fine wine investment market
In addition, commentators have for some years been at pains to slate the Bordelais for their very clumsy handling of En Primeur pricing. The great vintages of 2009 and 2010 were far too extravagantly priced, and subsequent inferior vintages showed insufficient discount to account for the quality differential. The market now has an awkward situation whereby quite a lot of the stock of vintages from 2011-2013 has yet to find a permanent home.
This creates a situation not dissimilar to the oil market right now. You will have read in recent days how stockpiling of the black stuff is going to keep a cap on prices through 2016, due to the reduction in demand even if OPEC tapers its production levels because the storage tanks of importing countries are increasingly full.
There is a difference in the case of the fine wine investment market though. Depressed prices of “off vintage” wines don’t necessarily affect the prices of “on vintage” wines, but they aren’t going to help. Large swathes of the market will take 2 bottles of 95 point 2012 instead of 1 bottle of 97+ 2010 (in the case of Mouton). Happily, that is not what everyone will do!
As we suggested in our last note of 2015, there is a difference this year because the 2015 vintage with certain critics will see wines as extravagantly rated as 2005 and 2000, if not indeed 2009 and 2010, but we can’t really see how, having eschewed several far easier opportunities to bring a bit of reality back to their issue pricing, the producers will offer a bargain in a good year. We shall see.
Chinese New Year 2016
As far as Chinese New Year is concerned, it has barely registered in the market as yet. To understand that, you have to know how the fine wine investment market in Asia operates. Chinese buyers do not tend to buy in great quantities from UK merchants. They buy from HK-based wine merchants. You will recall the rally in Left Bank wines through Q2 of 2015, with the relevant indices peaking in July.
This buying was led by Asian merchants, building up stock positions for demand in H2, which simply failed to materialise in the anticipated quantities. As a result, their stock levels are reasonably high running up to this CNY, hence the muted current demand from that quarter.
Bordeaux fine wines statistics and prices
The fine wine investment industry blogs (quite understandably) rely a lot on the Liv-ex statistics, as being a better authority than anything else on transactions in this marketplace. However, we would just caution against the belief that these are an exact reflection of reality in terms of volumes and prices per unit.
There is simply insufficient traffic going through the exchange to justify that view. Just because Bordeaux trades represent 74% of the total, roughly the same as in 2004, it does not mean that the market has come full circle in any way. In fact, the market has changed dramatically over the last decade, and fine wines regularly traded now were hardly on the investment horizon back in 2004.
One of the undeniable benefits of the correction in Bordeaux prices since 2011 has been the broadening of the market. Far more wines from Tuscany and Napa Valley are acknowledged and traded now than was the case in 2004.
The key question for Bordeaux in general, and as far as the Left Bank wines and First Growths, in particular, are concerned, is when they will start to go up again, and the answer has nothing to do with the fact that they have been in the doldrums for so long that they “must have their time again”. In investment terms, more money is lost betting on the turn of a market or a sector’s fortunes than at any other time in the cycle.
You only have to look back again at the way investors piled into Energy stocks last year to realise that, as an investment strategy, buying something because its price has collapsed is a pretty hazardous way to try and make money, yet plenty of people do it.
First Growths will come back into favour when the market decides that it would rather have a case of Mouton 2010 than a case of Masseto 2010, for the same price, and until we can identify green shoots of such a swing in market focus, we should continue to identify anomalous prices.
How Chinese investment is affecting the market
Investment gains are far more likely to be achieved if you can argue coherently that something is simply trading at the wrong price, than if you just hit and hope. The latest statistical evidence on fine wine imports into China makes welcome reading in that regard. In the first part of last year, overall wine exports from HK to China were up over 40% year on year.
Following more than a decade of growth, wine exports to mainland China direct from Bordeaux fell 16% in 2013 and 19% in 2014, but in the 12 months to the end of June 2015, there was a 3% rebound, and during the second quarter of 2015, Bordeaux exports to China rose 43%.
Recently released figures now show that in Q3 2015, China imported the same amount of French wine as it did in the whole of H1. These numbers are now escalating at a very healthy clip. The full increase for the first 9 months of 2015 is over 36% in volume terms, year on year.
Nor is the interest limited to Bordeaux, or even France. Although France accounts for over 43% of wine imports into China in terms of volume, rates of growth from Australia and Spain are both well over 50%. Something very seismic is going on here.
Not only do these numbers evidence a rapidly growing consumer base in China, but they also suggest the destocking consequence on the “Chinese slowdown” and anti-corruption drive is working its way through the wash.
On that note, may we wish everyone a happy and prosperous New Year!
This article also appears in the drinks business.