Wine investments and evaluating their financial performance.

Wine investments and evaluating their financial performance.
Photo by Xuân Thống Trần

The world of fine wines is a captivating one, offering not only a sensory experience but also a potential avenue for investment. In a market characterized by its unique dynamics and intrinsic value, wine enthusiasts and investors alike seek to navigate the complexities of this fascinating asset class. Understanding the key trends and factors that influence the wine market is crucial for making informed investment decisions.

We break down an article by Deloitte and Credit Suisse, titled "Collectibles Amid Heightened Uncertainty: Inflation and Alternatives," that provides valuable insights into the investment potential of collectibles, including fine wines.

The article highlights that fine wines, along with other assets such as classic cars, exhibit characteristics similar to bonds and hedge funds, making them moderately volatile investments. It also emphasizes that while certain collectibles like Chanel handbags and traditional Chinese works of art offer better protection against inflation, fine wines can suffer in high-inflation regimes.

Furthermore, the article provides specific insights into the performance of the wine market, particularly focusing on the price surges experienced during the COVID-19 pandemic and the subsequent inflationary period since January 2022. It notes the unprecedented boom in Burgundy wines, the significant price development in rare vintage champagnes, and the more restrained price increase observed in Bordeaux wines.

With the information from the Deloitte article in mind, we can explore the nuances of the wine market, evaluate the risks and opportunities associated with wine investments, and gain a comprehensive understanding of the regions and producers that hold the most promise for investment.

Wine market at a glance

  • Fine wines and classic cars are more like bonds and hedge funds, i.e. moderately volatile assets.
  • We find that Chanel handbags, traditional Chinese works of art and wristwatches offer the best inflation protection, while fine wines, modern and contemporary art, and American and Latin American art tend to suffer in high-inflation regimes.
  • Fine wines have experienced two recent price surges, one due to the COVID-19 pandemic and the other due to high inflation since January 2022.
  • Burgundy wines have seen a significant price development, with an unprecedented boom in recent years (12.3% p.a). The Burgundy Index has even outperformed the price of gold (11.1% p.a).
  • Rare vintage champagnes have been underestimated in the past, but their prices have risen considerably, increasing between 30% and 40% in the last two years.
  • Bordeaux wines have shown a more restrained price increase compared to Burgundy wines, with an annual increase of 8.5% according to the Liv-ex index.
  • Wine markets generally experience less pronounced fluctuations compared to financial markets like equities, partly due to smaller trading quantities and the fact that wines are collectors' items.
  • The fine wine market appeared to be lucrative for investors until around 2008, but with the internet and globalization, producers were able to explore the market more effectively and raise initial selling prices.
  • Investing in shares is considered a better and less problematic option compared to investing in wine. The quantities of sought-after wines are often too small to generate meaningful returns, and sourcing them in reasonable quantities is challenging.
  • It is essential to compare the Liv-ex 1000 index, which is more diversified, with the MSCI World index to gain a better perspective. Historically, shares have outperformed wine investments, even during the financial crisis.
  • Wine investments involve physical storage, insurance, and potential transportation costs. Counterfeit wines can also be a problem, and selling rare wines may only be possible at market price. Less sought-after wines often sell at lower prices, resulting in a substantial bid-ask spread.
  • Wine is not a permanent investment, as it can be affected by currency fluctuations, taxes, and has a limited lifespan compared to other financial products.
  • For those not interested in wine itself, there are safer and more efficient investment options available. However, wine enthusiasts may consider investing part of their wealth in wine, similar to the English model of wine dealers who handle procurement, storage, and subsequent sales.

Prerequisites for investing in wine

Storage and Transport: Proper storage conditions are crucial for high-quality collectors' wines. Wines should be stored at a fairly constant temperature between 11 and 14 degrees Celsius, with a humidity level of 68% to 72%. Bottles should be kept in their original cases, and storage, including insurance, can cost between USD 1.50 and USD 2.50 per bottle per year. Attention should also be paid to transport conditions when wines are resold internationally.

Aging Potential: When investing in wine, it is essential to consider the aging potential of the wine. Different wines have different aging capabilities, and the widely accepted aging guidelines may not always be accurate. Italian wines, particularly from Tuscany and Piedmont, are currently popular but may not last as long as Bordeaux wines. It is important to understand the aging potential of the specific wines being considered.

Vulnerability to Poor Storage: Burgundy wines have a better potential for longer storage compared to Italian wines. However, their low tannin content and fragile structure make them more vulnerable to poor storage conditions than Bordeaux wines. It is important to know the previous storage and transportation history of expensive Burgundies, as multiple owners and movements increase the risk.

Counterfeit Wines: Counterfeit wines are a significant concern, with experts estimating that around 20% of the most famous wines are counterfeit. Counterfeiting is particularly prevalent in the Far East. Counterfeiters can reproduce labels and even refill original bottles. Collectors' lack of knowledge contributes to widespread wine fraud. Consulting an expert and avoiding auctions from disreputable vendors is crucial when considering the purchase of rare and sought-after wines.

Natural Wines: Organic, biodynamic, and natural wines are gaining popularity. Natural wines aim to be as natural and unprocessed as possible. However, the production of these wines requires expertise and appropriate technical equipment to prevent spoilage. It is important to note that some organic winegrowers produce wines with very low sulfur content, which can result in quick aging and oxidative faults. Insufficient use of sulfur can affect the longevity of the wine.

Other Issues: There are additional challenges such as the cork-like taste (goût de moisi) in older vintages due to chloroanisole from wine cellars. Some famous producers have had to renovate their cellars to address this issue.

Currency Considerations: Investors with large-scale wine portfolios should consider the longer-term development of their chosen currencies. Fluctuations in currency values can significantly impact the value of wine investments. For example, the euro lost value against the Swiss franc and the dollar, while the weak pound benefited the English market.

Tax and Legislative Changes: Taxes and legislative changes can have a significant impact on wine investments. Changes in regulations, such as allowing wine auctions or abolishing taxes on wines, can shift market dynamics and create new opportunities. Conversely, tariffs or taxes imposed on wines can affect exports and demand.

Influence of Wine Critics: Wine critics, such as Robert Parker, have been influential in shaping the sales price and demand for wines. High scores from influential critics can significantly impact the market value of wines. However, the influence of wine ratings has decreased over time, and there is a trend toward the preference for well-known, long-established brands.

Cultural Factors: Cultural factors, such as lucky numbers, can influence wine investments, particularly for Chinese buyers. Certain years or vintages may be considered more promising or desirable based on cultural beliefs and preferences.

Important Wine Regions: When investing in fine wine, it is important to consider the most sought-after wine regions and producers. Bordeaux, Burgundy, Champagne, Italy, and California are mentioned as regions deserving special mention. However, the market is constantly changing, and investment trends are expanding beyond Bordeaux to include other regions.

Influence of China: China's influence in the wine market should not be underestimated. The buying patterns and preferences of Chinese consumers can significantly impact prices and demand. Wine prices may come under pressure if China reduces its wine purchases.

The importance of regions and wines

Personal preferences should not be the sole criterion when choosing wines for investment purposes. There are many excellent wines in the fine wine market that may not be in high demand and may not be suitable for investment.

The most sought-after wine regions and producers for investment in fine wine include Bordeaux, Burgundy, Champagne, Italy, and California. These regions have a strong reputation for producing wines that are desirable to collectors.

The list of recommended regions and producers is not exhaustive and is subject to change. The wine market is dynamic, and new regions or producers may emerge as attractive investment options over time.

The increasing trend in wine investments is not limited to Bordeaux; wines from Champagne, Italy, and California are also gaining attention as potential investment opportunities.

The influence of China in the wine market should not be underestimated. China's purchasing power can significantly impact wine prices, and if China reduces its wine imports (e.g., from Australia), it can put pressure on prices.

Bordeaux: Bordeaux wines are considered the benchmark for wine investments. They are easy to store, well-known brands, and have a large-scale production. En primeur prices spiked for certain vintages, but caution is advised with investing in high-priced vintages. The Bordeaux market recovered, but price increases were more restrained compared to Burgundy and Champagne.

Burgundy: Prices for Burgundy wines have risen significantly in recent years, making it one of the most sought-after and expensive wine regions. The choice of producer and vintage is crucial, and quantities produced are small, making it interesting for collectors. However, buying Burgundies from the secondary market can be risky due to high prices. Domaine de la Romanée Conti and Domaine Leroy are highly sought-after brands.

Champagne: Vintage champagnes have been undervalued for a long time but have recently experienced strong price increases. Well-known brands like Dom Pérignon and Roederer "Cristal" dominate the secondary market. Mature, high-quality vintage champagnes are gaining popularity. The market for other sparkling wine regions is not significant. Dom Pérignon is the market leader.

Rhône: The Rhône region has gained prestige due to Robert Parker's influence. Red wines from the northern Rhône are recommended, while the performance of the southern Rhône, particularly Châteauneuf-du-Pape, has been less convincing. Guigal, Chapoutier, and Jean-Louis Chave are recommended producers for the northern Rhône.

Tuscany: Italian wines, especially those from Tuscany, are in growing demand. Tuscany is comparable to Bordeaux in concept, with some wines resembling Bordeaux chateaus. Sassicaia and Masseto are dominant brands, while Brunello producers have somewhat subdued demand. Younger vintages are recommended due to Tuscany wines' shorter aging potential.

Piedmont: Piedmont wines, particularly Barolo and Barbaresco, are similar to Burgundy in concept. Nebbiolo is the dominant grape variety. Prices for the most famous wines have been in high demand, and careful selection is needed for aging potential. Buying directly from producers may provide a solid return. Bruno Giacosa and Gaja are important brands.

California: Prices for sought-after Napa Valley wines have experienced significant increases in the past 20 years. However, a market correction is expected for some highly priced wines. Some wines may age prematurely. Heitz wines have been underestimated and can be stored for a longer period. The market is mainly in the USA, with more restrained demand in Europe.

These key takeaways provide an overview of the regions, their market trends, and important brands and vintages.

Conclusion

In conclusion, the Deloitte article, "Collectibles Amid Heightened Uncertainty: Inflation and Alternatives," provides valuable insights into the investment potential of fine wines. It highlights the moderate volatility of the wine market, its susceptibility to inflation, and the recent price surges experienced during the COVID-19 pandemic and inflationary periods. By referencing this authoritative source, we gain a comprehensive understanding of the wine market dynamics and the regions and producers that hold promise for investment. Armed with this knowledge, investors can navigate the challenges and embrace the potential rewards of investing in fine wines.

Sources:

Collectibles amid heightened uncertainty and inflation | Deloitte Luxembourg | Art & Finance
This initial report aims to provide an overview of some of the most popular collectible assets fueling investors’ imaginations over the years.

Read more