By John Stimpfig
Published: June 19 2009 16:03 Last updated: June 19 2009 16:03(Financial Times)
Had this report appeared six months ago, it would have provided some very sober reading for wine investors. Not least because the end of 2008 coincided with the first significant correction in the fine wine market for more than a decade.
During the first half of 2008, Liv-ex, an index of the top 100 investable wines, climbed by a steady and impressive 9.5 per cent before stalling during the summer. In the final quarter of 2008 it fell by nearly 25 per cent; in October it lost more than 12 per cent of its value – the biggest monthly movement since its inception in 2001.
There are no prizes for guessing why. Despite the fact that the fine wine market had seemed impressively impervious to the hurricane blowing through the financial markets for most of last year, it clearly could not remain immune indefinitely. The collapse of Lehman Brothers was the turning point, as many private and institutional investors desperately sought to avoid losses in the ensuing dash for cash.
They were not the only ones looking to liquidate their wine holdings: merchants had seen the writing on the wall and had already begun to empty their inventories. Distressed sellers and restaurants also started offloading, while a number of wine funds found themselves on the receiving end of growing numbers of redemptions.
Never before had such a flood of investment-grade wine appeared on the market simultaneously. At one stage, it seemed to almost grind to a halt as prices tumbled.
The wines that lost the most value were, of course, those clarets that had gained the most in the bull run of the previous two years. Initially, that meant the top 2005s, which had surged in price and were in plentiful supply. Some prices fell by up to 50 per cent.
However, as things got worse, it was not just the 2005s that started to feel the pressure. Older vintages such as the 2003s and 2000s were also sucked in, as forced sellers continued to dump stock. The contagion also spread to rarer and more mature vintages, pulling down prices of 1996s and the 1990s in their wake.
The situation was perhaps the most challenging of the modern wine investment era, for a variety of reasons. First, the economic downturn was far more serious than anything in the past 50 years. And unlike the Asian crash of the late 1990s, this crisis was truly global.
Moreover, as Justin Gibbs of Liv-ex points out: “This time around, the amount of wine held for investment purposes had increased significantly, leading to a greater sell-off when the market turned.”
But amid the doom and gloom, several merchants and fund managers saw grounds for optimism. As early as December, Stacey Golding of Premier Cru Fine Wine Investments called the bottom of the market. “Historically, fine wine has been the last investment to fall and the first to recover. Early indications, however, are showing that now is the best buying opportunity since 1997,” she says.
Andrew della Casa of the Wine Investment Fund is even more bullish. “Notwithstanding the ongoing turmoil in the financial markets, we believe that investment-grade wine will generate positive returns in 2009, with double-digit growth returning later in the year.”
Why such fighting talk? No doubt fund managers were hoping to re-establish some much-needed confidence. They also hoped to promote wine’s credentials as a safe haven in stormy economic conditions.
Others look to the past to predict the future. “In previous periods of financial and economic turbulence, there were short sharp decreases in wine prices followed by a period of stability and a relatively fast return to good fundamentals,” says Will Beck of Wine Asset Managers.
Fortunately, the market did not drown in wine last winter. Instead, it somehow managed to soak it up, largely thanks to the sheer level of interest from Asia. Miraculously, demand there remained rock solid, effectively underpinning the market.
At the end of last year, one merchant was selling £150,000 worth of wine a day through its recently opened Hong Kong office.
Other merchants and auctioneers have also registered record sales from the region. Of course, Hong Kong’s zero wine tax and duty helped, as did sterling’s weakness.
“For the Japanese, our wines are almost 50 per cent cheaper than they were at the end of 2007,” says Richard Harvey-Jones of Seckford Wines.
The beginning of the year saw a degree of confidence return to the market and some cash-rich traders and investors felt the time was right to go back in for a bit of bargain hunting.
As the selling pressure of the previous quarter subsided, 2009 also saw the return of price stability.
January and February saw increases in the Liv-ex 100, with a slight dip in March followed by a small bounce-back in April, of 2.4 per cent. Last month also saw a slight gain. As a result, the index is now up 4.5 per cent for the year to date.
Other grounds for optimism include the brightening macro-economic picture and the staunching of a flow of redemptions experienced by a number of funds.
Better still, new money is coming into funds. Further evidence of the nascent recovery is the narrowing of bid-offer spreads. Meanwhile, merchants and traders such as Wilkinson Vintners are busily replenishing stocks. With four or five new funds circling the market, this could provide yet another shot in the arm for fine wine prices.
“If 50 per cent of these new business projections are met, the effect on prices should be notably positive,” comments Gary Boom, managing director of Bordeaux Index.
Other areas of the fine wine market have also performed beyond expectations. For instance, this year’s Bordeaux en primeur campaign was a turn-up for the books in almost every respect.
Going into it, there were fears that another undersold and over-priced vintage could affect the wider Bordeaux market. Fortunately, those concerns were not realised.
Instead, many wines were sold through the supply chain, providing yet more evidence of consumer confidence and an improving market.
The auction houses also appear to have bounced back after wobbles at the end of 2008. Estimates have undoubtedly dropped to lure bidders back to the saleroom. But it seems to be working.
For instance, the latest Acker Merrall & Condit sale on May 30 in Hong Kong netted $4.8m for the New York auction house, topping its March sale which raised $4.5m.
Beijing also saw its first fine wine auction this month, where two bottles of Lafite fetched four times their estimate – at a 70 per cent premium to most UK merchants’ prices. Clearly, the Asian love affair with Lafite still has some way to go.
As a result, nearly every commentator believes the Lafite brand will continue to dominate. Only last month, the 1986 and 1995 achieved gains of 10 per cent, while vintages such as 2008 and 2004 look well-priced.
So is now still the time to buy?
Certainly, the market looks much more secure compared with the turbulence of last year.
Many professionals, including Mr Boom, believe it should experience a significant bounce within the next five to six months.“It’s starting to look good again. Some prices are up to 35-40 per cent off last year’s highs and things are picking up. As long as nothing goes seriously wrong in the world economy, it’s a question of when, not if.”
Copyright The Financial Times Limited 2009