Crude oil hasn’t been the only liquid dropping in value recently—the prices of top-end Bordeaux wines peaked in mid-2011 and have trended downward since then.
The Liv-ex Fine Wine 100 index, a price benchmark comprised primarily of the best Bordeaux, rose dramatically from late 2009 to a high point of roughly 360 in May 2011. As of year-end 2014 the index had slipped back to about 240, a level that represented a five-year gain of less than 1 percent.
Does this mean it’s time to buy Bordeaux on the hope the market has reached a bottom? It could be, says Justin Gibbs, Liv-ex director and co-founder in London.
A brief review of the Bordeaux market’s history explains his thinking.
The China Effect
Over the past five years or so, Bordeaux wines went full-cycle from being a top-performing asset class to an underperformer. The driving force behind the price swings was the behavior of buyers in Hong Kong and mainland China and the spillover effects from those buyers’ transactions, Gibbs explains.
In 2008 Hong Kong became the “first fully tax-free environment for fine wine anywhere on earth—no sales tax, no duty, no nothing,” he says.
This arrangement allowed customers in Hong Kong to acquire wines at European prices plus transport costs. The timing was fortuitous because the 2009 and 2010 Bordeaux vintages were both very highly rated, which served to further spur Chinese demand.
Many of those buyers eventually realized they had been paying high or record prices for the top Bordeaux wines, however, and began canceling orders in 2011.
The Chinese government’s decision to crack down on corruption curtailed the practice of gifting high-end wines, reducing demand considerably and precipitating lower prices.
“One of the great gifts to be given (in China) in the early days of 2011 was a bottle of Lafite Rothschild,” Gibbs says. “Effectively the central government in China took away probably half the demand of the Chinese market, if you think that the government center accounts for about half of the Chinese economy.”