Recently a number of research papers have been released by specialist organisations denoting the Fine Wine Market outlook for 2012, which highlight a number of challenges and opportunities that face the market. Some of these elements are external economic factors, to which a market has no control, and some of these have been internally created and now investors of the Fine Wine Market will respond accordingly.
The global Fine Wine Market is worth approximately US$4bn; throughout 2009 and 2010 the market made a stunning recovery, which came to a sudden halt in August 2011. There are a number of reasons for the decline in prices. Primarily the dramatic halt in auction house sales of premium wine was due to the escalating European debt crisis and an increasingly gloomy market sentiment.
There has been reference to 2011 ‘as the year that the wine bubble burst’ however the concept of a bubble generally refers to a market segment that has been flooded with capital beyond its worth and therefore prices become drastically overpriced. This is not the case for the Fine Wine Market, however it is clear that some form of pricing correction occurred amidst external economic conditions that could not be foreseen.
There is a resilience to the leading wine producers in this market segment that distinguishes it from equities, structured products or the art market, (which could potentially be seen as more closely aligned). An interesting feature of the wine market is that generally market-leading wines have not just lead for decades but hundreds of years.
History shows us that every time there has been a correction these leaders have fallen for the period of the crisis, only to regain their former glory when the waters have calmed. The Wine Yields 2012 Fine Wine Outlook purports that periods of exuberance and correction have generally coincided with macroeconomic crisis including 1974, 1997 and 2008. The important thing to note however is that the wine market rarely loses its grasp on true value as seen in other segments.
An interesting trend is the demand we are seeing from China and Hong Kong where the rising upper middle class now have a taste for the investment. Last November an auction held in Hong Kong saw 145 world record prices set. This recently awoken demand favoured the small supply of Burgundy’s rather than the previously untouched Bordeaux. In fact, 2010 Bordeaux suffered its worst market fall in three years.
There is much speculation around the price fall of Bordeaux wines and their relation to the ‘En Primeur’ debacle that has come about. Historically Bordeaux has sold its most sought after wines in the futures market in a campaign called ‘en primeur’ which translated means ‘in first position’. Traditionally these wines have been sold to investors at a reasonable price mitigating the risk for the producer to sell their entire vintage at a price less than they perceive the value.
In 2009 the vintage was deemed to be extraordinary and therefore value for the price investors paid. Then in 2010 the en primeur tastings proclaimed that this vintage was again extraordinary. This was an embarrassment to the validity of the judgement of the wines as the 2010 vintage was at least the ‘fourth vintage of the century in just 11 years’.
The pricing of Bordeaux wines was therefore impacted. This then had repercussions for the entire Fine Wine Market quite simply as Bordeaux constitutes approximately 95% of secondary trading. We are seeing new world wines from Australia, New Zealand and the USA come into the market at a premium level which leaves some investors questioning whether the premium price for Bordeaux is still justified.
In summary the Fine Wine Market has begun 2012 in a state of unrest due to macroeconomic conditions and internal factors affecting the international stage. While history can never be seen as a precedent for future success, it tells us that an alternative investment such as wine does not directly correlate with equities. This can therefore be seen as an alternative investment for those looking to diversify their portfolio.
Source: Wine Yields 2012 Fine Wine Market Outlook
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