Macro Events on The Fine Wine Market
2019 saw a continuation of the unprecedented macro turbulence observed in the previous year. Domestically, the ongoing Brexit saga continued, just 15 days into 2019 the government’s Withdrawal Agreement was defeated by the largest margin in history. The leadership contest that followed brought a fresh batch of uncertainty causing GBP to tumble against the Euro and US Dollar. Towards the end of the year FX gained some traction closing 2020 with 3.34% and 1.21% gains against the Euro and US Dollar respectively. This can be seen in the 2019 plot below.
In our 2018 report we mentioned a depreciation of GBP giving incentive to overseas investors to spend their domestic currency in Sterling and secure fine wine positions from a UK merchant. We have seen this hold true, with a continued heightened interest coming in from overseas clients, moreover the modest 2019 gains in FX aren’t close to bringing Sterling back to pre-referendum rates so are doing little to dampen this interest. There is still incentive to those who hold their capital in a currency other than Sterling to make their fine wine purchases in the UK. This subsequently increases the liquidity of the UK fine wine market, benefitting both overseas and domestic participants. The stifled rates of Sterling have seen a prolonged increase in buying activity from Asia, mainland Europe and the US.
The tariffs on EU goods imposed on 17th October by President Trump’s administration is another macro incident which impacted the fine wine market in 2019. The goods included under the tariffs are wide spanning and include wines from France, Spain, Germany and the UK (although curiously not wines from Italy). The tariff on wine equates to a 25% tax due when the wines land on the shores of the US. The impact of the US tariffs on wine is twofold, simultaneously heightening interest in the US for wines produced either domestically, such as the wines of the Napa Valley, or from countries not included under the new economic sanctions. A decline in demand for wines that are now subjected to the tariff will naturally occur alongside.
President Trump’s protectionist approach to foreign trade is likely to rear its head again. The current bombast pertains to a possible 100% on all EU wines. Such an action would no doubt be faced with stronger retaliation, while bringing in the wealth of many other powerful winemaking regions, notably Champagne. Indeed, many US wholesalers and Retailers will begin political lobbying on a mighty scale, if they were forced under this duress. Importers/wholesales are currently trying to work hand-in-glove with producers to minimise price rises under the current 25% tariff, however, 100% would mark an unsurmountable increase for European wines and strong resistance domestically and of course across the pond.
In our 2019 outlook published in January we concluded that investors looking to hold a balanced portfolio of fine wine should profit take on some of their Bordeaux holdings which have performed well over recent years and place greater emphasis on other fine wine regions. This suggestion was upheld with Bordeaux’s performance in 2019. Moreover, the flattening in the Bordeaux market was likely accelerated by the events that recently developed in Hong Kong. In recent years we have seen swift growth in the Asian fine wine market, the continent, particularly mainland China and Hong Kong have shown a near unquenchable thirst for top Bordeaux. However, with the eruption of the ongoing civil unrest and rioting in Hong Kong, their priorities may have temporarily shifted away from fine wine.
The fine wine market in 2019 has seen some mixed results, the Liv-Ex 100, their benchmark index, ended the year 3.02% down since January 2019. This is a continuation of the performance seen in 2018 which saw a 0.13% loss. The larger contraction can be partly attributed to the political and economic developments seen in the UK and elsewhere in 2019.
Taking a broader view of the fine wine market is a good opportunity to revisit a characteristic we have historically observed; namely the inverse relationship between the performance of fine wine and conventional markets. This trait has previously made fine wine a valuable tool to protect funds from external factors and is used by astute investors to limit their exposure to downturns felt elsewhere in the macro climate. Further to protecting funds from contractions, those with positions in fine wine have also been rewarded with excellent capital growth. To put this in numerical terms, the Liv-Ex 100, has enjoyed 6.81% Compound Annual Growth since January 2002. To re-evaluate this, it is best to compare the performance of some key indices from traditional markets with the performance posted from the fine wine indices of Liv-Ex.
The traditional markets had a fruitful year in 2019, with positive gains posted across many indices. This is largely regaining some of the losses posted in the Brexit turmoil. The FTSE 100 rose 8.23%, the S&P 500 is up 19.58% and the Nikkei 225 gained 13.88%. Physical commodities saw similar success in 2019, the price of gold rose 14.93% and Brent Crude Oil grew 6.64%, albeit with the volatility that tends to come with the price of oil. When we compare these stellar gains with the performance posted by the Liv-Ex indices, the inverse relationship we have proposed is underpinned. Similar movement was observed across several of the region-specific indices; 8.40%, 3.03% and 2.13% contractions were seen across the Burgundy 150, Bordeaux 500 and Rhone 100 respectively. However, the same cannot be said for all indices, the Champagne 50 grew 2.16% and the Italy 100 rose 4.21%.
When we look at a plot of the traditional indices and the Liv-Ex 100 it gives a skewed outlook on the market, however, two things which can be seen are the low comparative volatility seen in the Liv-Ex 100 and the inverse relationship between the traditional markets and fine wine. These can both be seen in the chart below.
Looking at the region-specific indices in greater detail gives an explanation of why direct comparison to traditional markets gives an unrealistic outlook. We have previously speculated that the Liv-Ex indices paint a realistic picture of the wine market overall, but are not representative of the investment grade market, which is composed of only the most prestigious wines from each region. Creating a basket of these wines and measuring its performance gives a more representative view of fine wine’s climate.
Burgundy’s performance in 2018 was always going to be a tough act to follow. The Burgundy 150 index posted gains of 36.43% over the year whilst 2019 posted a loss of 8.40%. These disappointing returns are in part due to the US tariffs stifling demand for the wines of Burgundy, although their recent introduction means the current impact is limited. However, when looking at the top end of the region, modest growth is observed. Taking the average price of a selection of top wines from Burgundy, namely Rousseau Chambertin, Roumier Musigny, Leroy Chambertin and La Tache, St Vivant, Richebourg, Echezeaux, Grand Echezeaux and Romanee Conti from Domaine Romanee Conti (DRC). Aside from the small contractions seen in the price of Rousseau Chambertin and DRC La Tache, 0.94% and 0.90% respectively, growth was achieved by all other wines. The basket finished 2019 up 1.27%. Similar trends can be observed in the comparison, the Burgundy basket of top wines follows the same trend as the Burgundy 150, without the lower end of the wines included in the Liv-Ex index weighing the performance down. The performance disparity between the basket and the Burgundy 150 index can be seen in the chart below.
We suggested in our 2019 Outlook report that investors may wish to soften their exposure to Bordeaux in 2019 and diversify their portfolios into different regions. This was due to observation that Bordeaux may by entering a period of flattening. This is largely due to an adjustment for the aggressive growth seen after the Brexit referendum which we primarily attributed to the market’s inverse relationship with FX. Taking a basket of average prices from the five First Growths paints a similar picture, substantial growth was posted from May to August, which was largely taken back as FX got footing in the final third of 2019. Furthermore, the disruption in Hong Kong and the US tariffs on French wine have contributed to an underwhelming year for Bordeaux. We do not view the region to be at the end of a growth cycle, but rather adjusting back from the inflated growth post-referendum and stifled by macro factors. Again, in the chart below, the Bordeaux basket we have indexed follows the same trend as the Bordeaux 500 from Liv-Ex, but with exaggerated growth and contractions.
We identified Champagne as a region investors should look at diversifying into in 2019, looking at both the Liv-Ex Champagne 50 and a basket of top Champagne houses, namely Dom Perignon, Bollinger Grand Annee, Cristal, Krug and Salon, validates this suggestion.
The Champagne 50 index finished the year at 102.16 (rebased for 2019), making it the second-best performing region index from Liv-Ex in 2019. Furthermore, the basket of top Champagne outperformed all other baskets and Liv-Ex indices finishing the year at 109.92 in a 2019 index. It is noteworthy that this also beats the performance posted by the FTSE 100 over the same term (108.23). A graph of both Champagne plots can be seen below.
Italy was another region we identified as a good option for an investor wishing to diversify their holdings. This notion has been underpinned by the Super Tuscan’s of Italy (namely Sassicaia, Tignanello, Solaia, Masseto and Ornellaia) achieving growth in 2019 with an average appreciation of 4.98%. The Italian index from Liv-Ex posted similar gains rising 4.21% over the same term. This suggests that the investable spectrum of Italian wines is wider than that of other regions providing an access point for investors without the capital to acquire releases at the pinnacle of the region. The similar trend demonstrated by the Super Tuscan basket and the Italy 100 index can be seen below.
Two particularly exciting upcoming campaigns in 2020 are Brunello 2015 and Barolo 2016. The critics are heralding Brunello 2015 as a slam dunk, the best wines the region has produced since the legendary 2010! James Suckling claims the vintage is one that ‘nobody should miss’ and states of the 187 wines tasted so far, he has awarded ‘about half 95 points or more’. It is anticipated the leading wines of the vintage will sell out instantly as collectors rush to get a piece of the vintage which Suckling proclaims is ‘dense and rich…with great structure of tannins’ and may be the best Brunello vintage ever. Another highlight released in 2020 will be the Barolo 2016 vintage. Speculation surrounding Barolo as the next large growth region abound from its similarities to Burgundy, both in terms of vineyard division, terroir driven style, small production and the elegance of the wines, after some bottle age. Price rises have begun and in a forthcoming market report we will explore this further. Current interest and a great vintage make Barolo hot property.
Rhone in 2019 generated mixed results, the market felt the pressure of a third year heralded as a great vintage. Whereas 2015 was strongest in the North and 2016 producing excellent wines in the South, 2017 did not have a standout sub-region to stand by.
The Rhone 100 index from Liv-Ex ended the year 2.13% down, however, the index encompasses the Rhone as a whole and includes a broader spectrum of quality. This is not the best approach when ascertaining the health of the investment grade Rhone market. As before, creating a basket of prestigious Rhone wines which would ordinarily be considered investable (namely Jean Louis Chave Hermitage, Domaine Auguste Clape Cornas, Rene Rostaing Cote Blonde and La Landonne, Domaine Jamet Cote Rotie and Cote Brun and Chateau Rayas CNDP Reserve) and tracking their appreciation over 2019 tells a different story. Indexing the basket sees a peak in August of 116.65 and a finish to the year at 108.99. This equates to an 8.99% growth over the year, dwarfing the growth posted by the Rhone 100. From our basket, the top performers were Domaine Jamet Cote Brun which rose 12.77% and Chateau Rayas CNDP Reserve which is up 13.10% over the same period. This cements the notion that Rhone was a wise investment in 2019 and is the second-best performing basket we have analysed. The 2018 vintage En Primeur campaign has already started this year and is a promising vintage. Although it lacks the definitive North or South best performance, volume is down, some as much as 50%, due to mildew in the region. The vintage comes highly recommended and we believe astute investors will be handsomely rewarded.
Looking at performance over the last twelve months is a valuable tool for evaluating performance, however, it is wise to also include a historical analysis of a region’s performance. The table below demonstrates the returns seen in various fine wine indices compared with the growth of some more conventional markets since December 2003. The region-specific indices for Burgundy and Champagne have garnered the highest returns, with 444.75% and 293.85% respectively. Furthermore, of the top six indices listed, fine wine occupies five.
Aside from the excellent returns historically found in fine wine, alongside sizable CAGR, another fact that makes fine wine an attractive investment is the low relative volatility observed in the commodity. All points on the plot pertaining to fine wine are grouped to the lower end of the risk spectrum as demonstrated in the chart below.
Fine Wine investment in 2019 has been a mixed bag. In most cases, strictly following the Liv-Ex indices would have yielded underwhelming results. However, excellent returns have still occurred. Curating a portfolio from the top offerings in each investable region will result in balanced holdings geared to generate growth and mitigate exposure to downturns. Those with limited capital availability would be best suited to a quality over quantity approach when choosing wines to purchase. This perhaps is not so relevant in Italy which has demonstrated capital appreciation can be made across a broader spectrum outside of the Super Tuscans.
Unprecedented macro events continue to dominate the political and economic climate, what effect this will have on fine wine in 2020 remains to be seen. With Boris Johnson looking to bring the UK out of the EU by the end of the month and doubling down on securing a trade deal by the end of the year, a no deal Brexit is still firmly on the table. What implications this would have on the UK fine wine market are unknown, but GBP losing footing against the Euro and US Dollar, from current levels remains a strong possibility. This will continue to incentivise overseas buyers to spend their money in the UK which will bolster liquidity in the market. However, it also presents another issue as new releases and back vintages lying on the continent become proportionately more expensive for those looking to buy in Sterling; a double-edged sword. Another likely occurrence if the UK finds itself in a no deal setting at the end of the year is sharp gains in fine wine, astute investors ready to capitalise on this may find themselves in a fortuitous position. The tariffs imposed by the Trump administration are almost certainly stifling sales of French wine across the North Atlantic. An introduction of higher tariffs on EU goods could be seen in 2020 with reports of a 100% tariff to cover all wines produced within the EU. Such a move would likely further drive down demand with US wine merchants already hesitant about buying wines from Europe in the fear that a new tariff may be imposed whilst they’re in transit. This tariff could completely remove the US market from Bordeaux en primeur in 2019, which could lead to very advantageous prices if the Bordelaise react as they should. As the imposed tariffs will likely resolve themselves quickly, it could make Bordeaux 2019 releases perfectly placed to take advantage of market fear, driving release prices down. The tariffs will likely be removed by the time the wines are physical allowing savvy market players to swoop in for some handsome short-term gains.
There are too many question marks multifariously overhanging the global market to be able to make concrete predictions for the market in general. However, as posited above, we view Bordeaux at large as a fully priced investment commodity for 2020, though en primeur could mark a great opportunity. Burgundy’s blue-chip wines will continue to see growth, though in line with 2019, which was steady. Super Tuscans have a positive outlook for 2020, as does Barolo. We continue to view Champagne as a strong buy for the years ahead. Napa wines will see a renaissance of interest in 2020, though the 2017 vintage is not one of excellence for Napa, domestic requirements will ensure the wines see buoyed demand. We view 2020 as a stock pickers market, broad buying strategies based on region should be avoided.