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INVESTMENT CASE
SUPPLY AND DEMAND
Any lucrative investment must benefit
from the right supply and demand
characteristics and for fine wine
those characteristics are driven by:
The maturing process, which
encourages collectors to wait for
it to improve and thereby become
more desirable and valuable
Consumption, which increases
the rarity of certain vintages and
consequently pushes up their price as
more investors seek fewer bottles
Increases in international demand
International banking firm, Morgan
Stanley recently published a report
regarding the mass international
wine market which concludes that
a worldwide shortage of wine is
imminent, with global consumer
demand already exceeding supply – in
2012 the shortfall was about 300 million
cases – the “deepest shortfall in over
40 years”. The researchers stated that,
“Data suggests there may be insufficient
supply to meet demand in coming
years, as current vintages are released”.
Their statistics show that global wine
consumption has been rising steadily
since 1996, apart from a fall between
2008 and 2009, and currently stands at
around 3 billion cases. By comparison,
total production is estimated at 2.8
billion cases. This is in spite of world
wine production reaching a seven
year high in 2013, according to the
International Organization for Vines
and Wines (OIV) despite the world’s
vineyard area shrinking by 3,000
square kilometres since 2006.
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In terms of fine wine, the system
of various Appellations d’Origine
Contrôlée (AOC) and controls, strictly
limits what wines can be grown, where
and how they are classified and this
restricts the volume available; there
are no more grand cru vineyards to
expand into in Bordeaux for example.
The same applies in Burgundy where
grand crus and premier cru vineyards
are fixed and limited in size and some
producers of grand crus in burgundy
make only one or two barrels in a
vintage. E.g. Leroy musigny 2009
(592 bottles total production).
When natural conditions are also taken
into account, such as the weather, we
can see a fluctuation in quality and
quantity of the fine wine yield from year
to year. In fact, in the twenty years to
2011, production in the great estates
has been flat to down, a phenomenon
which has been compounded by the
fact that the chateaux have become
more quality conscious; with the best
vintages historically providing the best
returns, and the entire premise of fine
wine built on quality, the increasing
transparency of the market, with
information on tastings now ever more
easily and quickly disseminated and the
power of the critics growing, it would
seem that producers have recognised
how essential it is to maintain and
improve the excellence of their brands.
Indeed, according to the Wine Institute,
wine production in France, the biggest
producer of fine wine, dropped by
12.52% in the years from 2009 to 2012.
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This means that the very best wines
are highly restricted in supply and face
increasing demand, with increasing
growth of affluent buyers, who are
looking for a status symbol, a store of
wealth and a pleasurable possession.
In both emerging markets such
as China and established markets
such as Europe and the US, where a
study by BMO Private Bank recently
found that more than half of high net
worth Americans are adding hobby
investments to portfolios
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, pressure
on pricing of the most popular
and rare vintages is inevitable.
Hence, it is changes in demand which
have been the main determinant
of price
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, as is evidenced by the
withdrawal of Chinese interest in
Bordeaux in 2011 and the following
drop in Bordeaux values.
DIVERSIFICATION
A portfolio of uncorrelated assets is
what any investment manager strives
to create, so that what affects one
investment’s returns and growth does
not affect another in the same way. The
intention is to ensure that returns in
one part of the portfolio offset losses in
the other so that the portfolio can ride
out unpredictable economic conditions.
CORRELATION WITH
MAINSTREAM MARKETS
The crash in 2008 gave many
investors an unpleasant shock in that
investments which had been considered
as good diversifiers were actually highly
correlated and sharp negative price
movements were mirrored across
developed and emerging equities,
bonds and property. This meant that
the search was on for assets that are
not correlated with the mainstream
public markets in any conditions; wine,
with its inverse supply and demand
curve and only a 15% correlation with
the mainstream financial markets
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, is
a good candidate and its performance
during 2008/2009 proved it does not
follow the mainstream markets volatility
or acute downward movements.
There are several key factors upon which an investment case
for fine wine can be built, the most important of which
are supply and demand, diversification and returns, which
are aided by the potential for beneficial tax treatment.
