“Bordeaux is France’s biggest wine exporting region, so what goes on there is closely watched by wine experts around the world. Bordeaux dominates the wine market. More precisely, the perception of Bordeaux dominates the world trade in fine wines. When people talk of wine prices, invariably they mean Bordeaux prices, because Bordeaux wines are the only wines that are truly a commodity. Old Bordeaux are sold at auctions, like paintings and rare jewels, and new Bordeaux are bought on future contracts, like wheat and pork bellies”.
Recent years (2006–2008) have seen a huge upsurge in Bordeaux prices across the board, during an unprecedented era of upward price spiralling driven by the now collapsed real estate boom, general speculation in artwork and wine, and a huge increase in demand from the newly emerging markets of China and India, in what amounts to an orgy of spendingby many in the City of London and in other markets as part of the world wide boom.
Whilst in the early 2000s, there had been predictions of a drop in French wine prices because of the Asian financial crisis, declining Japanese demand and growing competition from wines elsewhere in the world, suddenly things changed.
Bordeaux wine turned into a vehicle for financial investment big time, at a time when stocks and shares and equities were already looking vulnerable. There was a lot of “crazy money” going into wine at the end of the boom and continuing demand and from China and India.
What’s been happening?According to the Decanter Bordeaux price index, during August and September 2008, before the global economic meltdown and the so called credit crunch in which the world was in the grips of a perilous market crunch as witnessed over the last month, there was a huge increase in the price of Bordeaux Cru classés. Brand Château Lafite was head and shoulders above the rest with a massive return of 76% across all the vintages. Many ascribe Lafite’s success to the volumes which were available in the global market and to its popularity in Far Eastern markets, which drove up prices above and beyond those of its competitors. The pick of the bunch would have to be the 2003 Lafite which was up 80%, from £3,500 a case to £6,500 earlier this year.
Apparently a number of investors “decided to indulge in a bit of profit taking over September and October 2008, which apparently saw some vintages falling in value including the 82, 86 and 2003”. It will be interesting to see how these vintages continue to perform in the months ahead, after “the meltdown”.
The so called ‘G8’ (Great Eight) in Bordeaux, have a high profile and huge demand, but the tiny output (supply)means they offer little in the way of liquidity or availability. As a result, their sheer rarity, allied to quality, invariably drives up prices in leaps and bounds – particularly in sought after vintages. “According to reports the top performing wines over the period September 06 to September 07 include the 86 Mouton, which was widely regarded as the wine of the vintage. It was up from £4,200 to a cool £7,900 (+71%). The 1990 Le Pin also posted an impressive increase in value, up by 68% from £12,000 to a shade over £20,000 over the same twelve month period. Clearly, anyone who had bought into both these wines has seen some very handsome returns. However, the biggest mover of all was the 2005 Ausone which rocketed up in value from £8,850 to £17,148, registering a remarkable 93% increase”.
DEVELOPMENT OF INVESTMENT SCHEMES
What are the antecedents to all this investment gone wild? By emphasizing wine investment (an amusing pastime but one only marginally connected to wine drinking), the 1982s created a new form of investment, with wine being transformed into an investment vehicle or object with Bordeaux being the niche. It is not a mere coincidence that wine Guru Robert Parker arrived on the scene in 1982 and introduced the 100 point system for evaluating wine, and this seems to have given the investors a feeling of financial legitimacy.
Since then, almost every discussion about Bordeaux has been based more on their investment potential than on their ultimate merit in the glass. It’s doubtful whether more than a handful of the people who bought their ‘82 futures will ever taste the wine. During the last few years we have seen the development of investment funds including the Financial Times Wineplan (which allows you to buy and store the best wine for future pleasure or resale). Other wine investment funds aimed to cash in on the wine bonanza that saw fine wine prices rise eight-fold since 1978 – a compound return of 8.7% a year, according to the Decanter Fine Wine Tracker index.
Advertising featured such advice as: “If you don’t know your new world from your old world and aren’t able to deal with the delicate issue of storage yourself, then getting an expert to do it for you could be a tempting prospect.”
But the fees structure was very similar to that of hedge funds e.g. investors pay an initial 5% fee, 1.25% subscription fee, plus 20% of the overall gain that is over a hurdle rate of 50%.
Even now profit from investing in wine has been free from capital gains tax because it is classed as a ‘wasting asset’, but according to experts “the government may begin to crack down if it thinks such assets are being used as a tax dodge.’’
EVOLVING FEARS AND “CASH IN” SEPTEMBER 2008
That would be drinking up the (probably illusory) profits by the end of September 2008 though, it looked like any fears of a major correction were unfounded with the resumption of strong demand kicking in from the Far East. According to Miles Davis at the Fine Wine Fund, “the equity markets and notably the emerging markets have marched on as if the summer crunch never happened. The Hang Seng Index in Hong appears to be on steroids”.
The principle reason was, of course, the fall-out from the so-called credit crunch and some fairly worrying volatility in the financial markets. The net result was a number of nervous investors inevitably deciding to take their profits while the going was good. Suddenly, for the first time in over a year, there were more sellers than buyers which meant that prices suddenly softened.
PRICES NOT IMMUNE FROM ASSET PRICE DOWNWARD SPIRAL
With the latest economic developments and general meltdown of the system it would be naïve to imagine that this continuing investment boom in fine wines will continue.The UK’s FTSE index has crashed and we have witnessed the British government coming to the aid of the banks with an emergency recapitalization package. It is clear that this will inevitably have repercussions on housing prices but also on other types of consumer spending, especially on luxury goods. This downturn is taking place at the same time as a real estate downturn and the problems are being exacerbated by a crippled financial sector and huge redundancies of City bankers and people employed in the financial apparatus.
Many of these people are now without income and will be looking at liquidating some of their less necessary liquid and non liquid assets. And certainly, a wine cellar of Bordeaux wine is perhaps on the list? Now the last two strongholds of China and India are also suffering significant contractions, economic problems and the demand will be limited, and the secondary market will come into play with many selling off their Bordeaux cellars, to ease the pain.
With a possible flood of Bordeaux wine assets onto the markets, this will have a huge impact and we will see dramatic price corrections in the price of Bordeaux. This is as inevitable as the huge decline in the value of real estate and other assets, none of which are immune to the laws of supply and demand as a price determining mechanism.
Even so, there still remains a question mark over where the market goes from here. Will it get back into gear or has it run out of gas – at least for the time being? Until as recently as September 2008, most traders including Geraint Carter at Bordeaux Index and Steven Browett at Farrs were putting a positive spin on the situation. They believe that the Liv-ex falls were inevitable given the way in which the market had performed over the last twelve months. In fact, many had actually welcomed the pause for breath arguing that a period of pricing consolidation was, and is, beneficial. As a result, the majority of brokers, traders and wine fund managers remained relatively bullish about the outlook for the remainder of 2008, based on stronger demand in October and the beginning of November. Some even argued that the problems in the mortgage markets might benefit the wine market – given wine’s value as a diversifi cation tool. And so it was until very recently.
Now with complete economic meltdown, all this conjecture is clearly nonsensical! Others though argue that on-going uncertainty in the financial markets could keep the fine wine sector stuck in the pits for longer than it would like. One of them is wine writer and former financial journalist Nick Faith. He argues “that the market in fine wine cannot be considered separately from the world’s economic situation, as reflected by the fact that the buyers of fine wine are today, above all, in the financial community. Worryingly, Faith thinks that we are at the beginning of a long bear market, to be measured in years not months.” “Wine is for drinking” Baroness Rothschild worried that it may result in speculative bubble
The greatest economic boom was generated by wanton greed, and many of the investors are the Bankers & Stockbrokers in the city. It’s a panic reaction and will stifle economy of others not involved. So too we saw an upward spiral in Real Estate prices – fuelled by unlimited finance and greed – and the development of a Speculative Bubble – with new markets – Russia, China, India and South Asia chasing the Big Names / Cru classé. And demand art stripped supply on which the Bordelaise when happy to play the market and profiteering because the price of these wines bears no relationship to reality. Defying gravity, but for how long.
Downward spiral in price – same rules of economic as Real Estate. Foreign money / Credit ad high demand fuelling speculative / Wine market – driven by greed. We also saw disbelief in the Real Estate – at the suggestion that prices could fall – that there could be a correction. We witnessed this “unbridled optimism” in the Real Estate sector – also then the Crash.
Even such notable authorities as Mme Phillipina Rothschild has cautioned about price bubbles and saw the imminent danger as elucidated in various interviews. It now appears that these prices have no correlation to reality. Speculative bubble like Real Estate. The crazy part is that in a professionally conducting blind tasting these investors wouldn’t be able to pick their own wines.
