October 19, 2012

Time to Buy Fine Wine?

Experts point to a dip in prices as a possible opportunity for purchases

Jamie Ritchie, CEO and president, Americas and Asia for Sotheby’s Wine. Jamie Ritchie, CEO and president, Americas and Asia for Sotheby’s Wine.

After several years of moving higher fine wine prices have fallen in 2012. The table shows the year-to-date, one-year and five-year changes in the London-based Liv-ex indexes through Sept. 30, 2012.

The Liv-ex indexes’ component wines are showing a general trend toward lower prices after a mid-2011 peak.

Jack Hibberd, head of data and marketing at Liv-ex in London, cites several reasons for the pullback. Up until the middle of last year, the market remained fairly bullish, he explains, but a very expensive campaign for the 2010 Bordeaux signaled the start of the downturn. Prices were unrealistic; consequently, the wines didn’t sell very well and Hibberd believes that “really took a bit of momentum out of the sales.”

At the same time, the European Union’s debt crisis was unfolding and demand from Chinese buyers began to soften. aa

The China factor was vital, says Hibberd: “The Chinese market has been extremely important in fine wine demand. As with a lot of luxury goods, the Chinese market slowed down considerably probably from the latter half of last year till now. And now as the price has been up by a factor of two or three over the last few years, we saw people taking profit. That then moved into a correction, and then probably moved into a bit more of a serious correction.”

With prices off from their peaks, is this a good time for fine-wine collectors to start buying again?

Hibberd cautions that Liv-ex does not offer wine-trading advice but notes that the market has been relatively static and flat for the past eight weeks or so. “It seems like for now that most traders believe that the correction is at least paused if not over,” he says.

Jamie Ritchie (above), CEO and president, Americas and Asia, for Sotheby’s Wine is also cautiously optimistic. “I think there is an opportunity. We are still getting strong pricing for top Burgundy for, let’s say, the top 10 growers,” he says.

“All Burgundies is relatively strong,” Ritchie explains. “California wines have strengthened, and they are selling well, and older Bordeaux, some mature Bordeaux, is still selling well. What has softened in the marketplace is what I call commodity Bordeaux, particularly from ‘95 and younger that has not really been consumed in scale yet.”

The pattern of historical returns also supports the idea that this could be an opportune time for buyers, as the following chart shows:

Index

Year-to-date

1 year

 5 years

Liv-ex Fine Wine 50

-10.6%

-22.6%

20%

Liv-ex Fine Wine 100

-9.2%

-19.4%

6.8%

Liv-ex Bordeaux 500

-6.3%

-12.9%

27.0%

Liv-ex Fine Wine Investables

-9.0%

-18.2%

18.7%

 Source: Liv-ex.com website

***

Some of the Liv-ex indexes track 200 wines from 24 top Bordeaux chateaux, with data going back as far as January 1988, and this data mirrors the performance of a typical wine investment portfolio.

According to the group, the five-year CAGR is currently under 4% - the lowest it has been since 2006 – and well below the long-term average of 14.9%; the CAGR for the last 24 years of 12.5%).

“For 75% of the time, returns have averaged more than 5%, and for 60% of the time they have exceeded 10%. The CAGR has only been negative once,” it said in a recent blog.

“The CAGR may be at its lowest in six years, but one thing is worth considering. Historically, when investing at a time when the previous five years had returned a CAGR of less than 5%, the average compound return achieved in the following five years was 17.6%: a positive number to remember as we move into the second half of the year.”

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