What’s spuds got to do with it?
At the start of this year, the Liv-ex Fine Wine Exchange announced the creation of a new index, the Liv-ex 1000. This was a deliberate strategy on their part to highlight the fact that whilst its own narrower indices, the Liv-ex 50 and Liv-ex 100, had struggled again last year, the “poor performance of the dominant first-growth wines, from Bordeaux’s left bank, hid better news from elsewhere”*. And that better news from Burgundy to Tuscany and beyond (including even Bordeaux’s own Right Bank) was such that the 1000 index actually saw a rise last year of 3%. As APM’s clients are well aware, such wines as Masseto, Opus One, and Pavie have enjoyed a more than respectable 2013.
So what exactly does the creation of this new index mean? Quite simply, the 1000 index will become a more genuine proxy for the market. In doing so it already adds value, because the current indices (the Liv-ex 50 and 100) are far too narrow to have any value other than relative to other indices, either broad or narrow.
Say you own a market stall and sell way more potatoes than anything else. Because you sell so many more potatoes than anything else, their price becomes a proxy for the price of vegetables (in general). As a result when people who don’t know any better (market commentators, say, who want to make things easy for themselves) make observations about how high or low vegetable prices are, what they really mean is that the price of spuds is up or down. Now imagine you’re a farmer growing beetroot. There is relatively less beetroot in the market so the price of beetroot is only really relevant to the farmer and whoever wants to buy one. Same for all other vegetables individually sold in much smaller numbers than potatoes.
Then people stop buying potatoes because they have become too expensive. So it makes no sense for the commentators to talk about the price of vegetables when really they mean potatoes, because it has no relevance as no-one’s buying them. So they have to either talk about all other vegetable prices individually or put together a notional basket of ten (or so).The resultant basket is a far more accurate reflection of “the price of vegetables” than it was before. However, in the process, people have become aware that it’s all very well talking the price of potatoes, when there’s a lot more vegetables in the market, at varying prices, than that. Ultimately people simply become more aware of the price of individual vegetables, even as the aforementioned commentators are still talking about the basket because it is easier for them to do so.
Back to the wine market! All the Liv-ex 50 (potatoes) has future relevance to, therefore, is future indices which the Liv-ex is likely to introduce, clarifying price movements as to Right Banks, Burgundies, Supertuscans, and so on, as well as the 1000, in respect of performance against those other indices.
*Justin Gibbs of Liv-ex quoted in the FT – Jan31 2014