Wine wars – Piedmont strikes back

10.10.2019 – Wine Investment –

Well it’s been a long time coming but we are now able to introduce the great POTUS into our weekly column, because finally his tentacles have extended themselves into an area of our direct concern. As all investment advisers should be, we at Amphora are politically agnostic. Just like in any business with a pulse we have heated political discussions amongst ourselves, but we can’t allow individual preferences to interfere with investment advice; we are a broad church so any attempt to publish political bias would be “debated away” at source.

Now, however, tariffs have reared their ugly head, and in case anyone was unaware, the US have given themselves the green light to impose a 25% tax on wines from France, Spain, Germany and Britain, which could come into force as early as the end of this month. We will not devote column inches here to the background to this matter which can easily be found elsewhere, because we are more concerned about the implications within our market place should the tariffs go ahead.

No-one should be in any doubt that the US is an important buyer of fine wines from around the world. They also have a voracious appetite for their own, incidentally, which is why marketability can be quite thin even for those like Opus One and Dominus which are produced in larger quantities. For the likes of Harlan Estates, Sine Qua Non and Screaming Eagle distribution is via the cellar door to a very tight list and woe betide anyone not taking up their annual allocation.

Curiously wines from Italy are not on the tariff list and now is not the time to investigate the nature of Donald Trump’s relationship with Silvio Berlusconi. Suffice to say Piedmont and Tuscany can breathe a sigh of relief, and this makes the recent Liv-ex report into the fine wines of Italy particularly opportune.

It is fair to say that most fine wine investors and collectors know their Super Tuscans, not least because of the way they provided a welcome port in the Bordeaux-correction storm back in 2011. From mid 2013 to early 2016 Masseto 2001 was more expensive than every single First Growth vintage bar the Millennium years, with only Latour 2009 and 2010 occasionally sneaking ahead.

We have often said that the best thing to emerge from that correction was the broadening of the market, and although wines from Napa, Spain and Australia (to a lesser degree) all contributed it was the wines from Tuscany that benefitted most. The Liv-ex talks about the performance over the last 5 years as being more muted relative to the rest of the market but to our way of thinking that is simply a starting point effect. Their outperformance was from 2011 to 2013 and that period brought them into focus.

We have been ruminating for some time about the expansion of Italian interest beyond Tuscany, in terms of raising the profile of the exquisite Piedmontese wines of Barolo and Barbaresco, and had been grappling with the inevitable considerations of secondary market. The lack of active trading is reminiscent of Burgundy and that had increased our caution, along with the fact that there is as yet no history of re-selling in the sector.

Interestingly the Burgundy analogy is appropriate on the ground too. Bordeaux and Burgundy differ in many ways, obviously, but for the moment let’s focus on scale and grape. Bordeaux has large vineyards, and the grapes used tend to be blends of Cabernet Sauvignon, Merlot, and Cabernet Franc, although this is not an exhaustive list. Vineyards in Burgundy are tiny and they use Pinot Noir grapes exclusively (for their red wines).

In Italy the Super Tuscans operate larger vineyards and although Merlot dominates Masseto production the others use combinations of Cabernet Sauvignon and Cabernet Franc (Sassicaia), Cabernet and Sangiovese (Tignanello and Solaia), or Cabernet Sauvignon, Cabernet Franc, Merlot and Petit Verdot (Ornellaia). Up in Piedmont the vineyards of Barolo and Barbaresco are much smaller, operate on a single basis and use only Niebbolo grapes. Sound familiar? There is an additional disaggregation reminiscent of Burgundy in that Gaja as a house produce several top quality investment grade wines designated by plot, such is the scattered nature of their ownership around Barbaresco.

So where is all this leading? The market is in a state of constant alert as to what the next big thing might be, and where the incredible performance of Burgundy in recent times (if not so much this year) might lead. If from a chronological perspective Bordeaux passed the baton to Tuscany which in turn passed it to Burgundy, where is it headed next?

We are firmly of the view that the broadening of the fine wine market will continue as global exposure to its opportunities increases. It is in the nature of these things that the spotlight as it revolves will alight on new areas of interest. We are open to the idea that although, as the Liv-ex report points out, the wines of Barolo and Barbaresco have outperformed their peers in recent times, we might still be in the foothills in respect of how far they may go.

As portfolio managers we have to be alert to the risk aspect of any investment, and there is no doubt that we are at the high risk end of the spectrum here, but we will be doing more work on these wines in the coming weeks because for a lot of investors an element of higher risk is what they enter the market for. Thanks to the tariff hikes elsewhere it may well be the time for Italy’s “Burgundies” to come to the party. The additional question, of course, is the degree to which they might stint US acquisition in Bordeaux and Burgundy themselves..