The rise and fall

15.01.2020 – Fine Wine Investment –

There is little doubt that 2019 was an indifferent period for much of the fine wine market, but if the RHS can start this year by proposing as new President a gentleman called Keith Weed then presumably anything can happen in 2020. Perhaps they’ve never come across Hugo Rose, MW. Anyway, what might the year have in store? 

A glance at the performance of most wines over the last 12 months would reveal that there were one or two outstanding risers in Burgundy, from Domaine Leroy in particular, notwithstanding the overall Liv-ex sub-index decline in Burgundy. It is inevitable in highly illiquid areas of the market that there will be swimmers against the tide. 

The most significant general firmness however was from Tuscany. Apart from Masseto, where the rise/fall ratio was around 50:50 for all vintages this century, there were only a handful of decliners from Sassicaia, Ornellaia, Solaia and Tignanello put together. The following chart captures the sense quite well: 

Nor can the Super Tuscans simply be accused of rebounding from an oversold position, having outperformed other key sub-sectors over all recent time frames. 

Amphora ended 2019 talking quite extensively about the possibilities for Piedmont, and that interest can be extended on to the Barberas and Brunello di Montalcinos of this world, albethey with the same secondary market caveats as the Piedmontese at this juncture. It is encouraging though to see this outperformance from their more established near neighbours. 

When reviewing 2019 it is traditional (already!) to take into account the all-pervasive uncertainty which plagued the year. Whether it is global trade, geopolitical risk, or plain old Brexit, everywhere you look there is an excuse for market detachment. What is interesting in light of that is the performance of equities which seemed to shrug off these cares, until you realise in the case of the FTSE that it has just recovered from the correction at the end of 2018 and is still shy of the May highs of that year. 

The profile of the S&P is altogether more positive, but then it had no Brexit to worry about. To some extent neither do we now, or rather we do, it’s just the uncertainty has morphed from if and when, to how. If we attribute the becalmed market conditions last year in part to our separation from the EU, we need to have a view on the current situation to establish an outlook for the year. 

A lot of investment houses are politically agnostic, either because they believe politics is not a fundamental determinant of performance over the longer term, or because they don’t want to upset any of their clients by espousing the “wrong” political view”. Let us state, then, that Amphora is politically agnostic, for the latter reason! 

For what it’s worth then, we see a reduction of uncertainty for the current year, but not a disappearance. This has to be considered in an investment environment which is never, ever, without uncertainty, but we believe mainstream markets are more used to dealing with the implications than “collector” markets. 

Put it this way: a pension (perhaps the archetypal investment vehicle) simply HAS to own equities, it is just a matter of degree. The reason is that if negative forecasts turn out to be wrong the rebound in equities will be so great the underperformance will result in investment managers losing their jobs. It therefore becomes a risk assessment issue. 

A “collector”, or an investor in a collectable market, very seldom HAS to go to market to buy whatever the relevant good happens to be. Let’s be frank: no-one needs to own a portfolio of wine, like a pension fund needs to own equities. The reason people might to own a portfolio of wine is that it has a good chance of engineering a capital gains tax free gain, but if you don’t think it has that chance then you will avoid it. By and large that’s what people did last year. 

That view doesn’t take account of genuine collectors, of course, for whom the investment gain is secondary, or maybe not even that. A genuine collector is driven by an interest in ownership, for whatever reason. Scarcity is often the motivating factor, and availability then becomes key. Prevalent market uncertainty can be utterly irrelevant. The thing is, such participants do not dominate the fine wine market place. 

So who does? Well it seems to be reasonably split between consumers and investors, but there are often difficulties distinguishing the two, especially in Asia. The major players, who often own unfeasibly large portfolios, tend to style themselves as consumers first, and investors second. But there are often intermediaries between them and the market. Back in 2010 it wasn’t consumers in Asia driving the market through the roof, it was speculative involvement often through these intermediaries, who assumed their end users would just keep buying forever. 

Adding to the uncertainties besetting the fine wine market last year were the disturbances in Hong Kong. Undeniably these brought about a cessation of activity from that region. When we talk about consumers, therefore, it is not just people buying a bottle of Lafite in La Gavroche because they are celebrating. Important as they are in aggregate they are often bit players in the overall scheme of things. I’m afraid a Chinese mogul’s whimsical decision to throw a party outweighs the London restaurant demand by some margin. Clarity on the Hong Kong front will be helpful. We sense that the current stand-off will not last all year. 

All this leads us to the conclusion that we are likely to have seen the bottom both in terms of prices and volumes, as the degrees of uncertainty diminish this year. It may take a while for momentum to build up, but as in all markets the move after a period of torpor can be significant. We would strongly argue that such a move is unlikely to be down, as loose holders have had plenty of opportunity to offload over the last year, especially as Sterling firmed up over the second half. 

As we pointed out last November, one of the current top picks is Sassicaia 2013. Most Tuscan 2013s are underpriced actually, and this captures both the current favourable sentiment in respect of Italy and the healthy secondary market most investors need.