The correction in the fine wine market may have run its course, giving investors and collectors a chance to enter at attractive prices.
Fine wine is a highly sought-after passion investment, alongside fine art, luxury watches, and classic cars. Investors like it as a valuable alternative and a hedge against inflation, given its tendency to outperform equities during market downturns.
For example, the Liv-ex 100 index, reflecting the price changes of the top 100 wines in the secondary market, rose by 13.1% last year compared to the S&P500 and Nasdaq which fell by 18.11% and 32.54%, respectively. Looking at a broader timeframe, major indices indicate that the average value of wines has surged by over 70% in the last decade. The 2023 edition of Knight Frank’s Wealth Report highlighted a cumulative 162% return on wine investment over the same period.
However, the fine wine market witnessed a price collapse after a robust 28-month outperformance from June 2020 to October 2022, fuelled by high-net-worth individuals curbing luxury travel spending. This underperformance has persisted, with the Liv-ex 100 index down over 10% this year.
This is as the fine wine market experiences an overdue normalisation versus other asset classes, says Amphora Portfolio Management director David Jackson. Most market observers were not surprised, adding: “After any bull run, there will be a period of consolidation, and fine wine is no different. We knew it was coming, and the marketplace needed the volatility.”
Unlike any other asset classes, the activity of merchants dictates fine wine prices as they are major stockholders who manage inventories based on perceived demand. In spring this year, merchants struggled to sell their stock and stopped buying throughout July and August, which are traditionally very quiet. In September, however, demand started picking up, leading to merchants scrambling to fill their shelves, Jackson says.
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This has led to indices starting to change direction. Jackson believes it is reasonable to believe that the correction in the first half of the year has run its course. “We are now back to normal market conditions. We can even say with some confidence that the fact that the merchants’ shelves are so bare means that there will be a flurry of buying for the next couple of months, so we should see good price increases as a consequence,” he adds.
Cru World Wine co-founder and CEO Jeremy Howard concurs, adding that the minor pullbacks create an opportunity for new investors and collectors to enter at attractive prices. “As we noted in our recent report, it is unusual for fine wine prices to correct more than 10% outside of major economic crises. So, we have been advising clients to start positioning now for the next upcycle, which we believe we start in the next couple of months.
“Opportunities have re-emerged, especially in sectors like Champagne and fine Burgundy, where prices have eased back to more attractive levels,” he adds.
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Amphora Portfolio Management director David Jackson. Photo: Amphora
Market and demand shifts
Fine or investment-grade wines mature and improve in the bottle over time. Unlike non-investment-grade wines that deteriorate rapidly after about seven years, fine wines can retain their quality for over 50 years, leading to increased value.
As wine is consumed, the supply effectively decreases. This imbalance between demand and supply is the main driver of investments. Certain statutes support the imbalance, such as the Bordeaux Wine Official Classification of 1855, which states that only a certain amount can be produced each year.
Howard explains that fine wine has similar qualities to many luxury collectables but with a couple of important differences. For one, most collectables require a certain amount of maintenance spending to maintain their value. On the other hand, fine wine only requires good quality storage, which costs less per year than gold or silver.
Storage is critical for fine wines as even the best investment-grade wines lose their value when they oxidise or their flavours dissipate. Investors need a dark area with optimal temperature and humidity to store wine properly. Several professional storage companies in land-scarce Singapore offer wine cellars, such as Singapore Wine Vault and Winebanc. If investors choose to work with firms such as Amphora or Cru, their collection would typically be stored in a bonded warehouse.
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Cru World Wine co-founder and CEO Jeremy Howard. Photo: Cru
Howard says that fine wine also has a unique “consumption curve”, which sees a significant quantity of any given vintage consumed yearly. A study Cru conducted recently showed that over 90% of wine was consumed within 20 years of production.
Additionally, in markets like Singapore, fine wine enjoys some tax benefits as it can be bought, held and sold without incurring duty or sales tax as long as it is held in a bonded warehouse.
Fine wine is traditionally heavily in demand among consumers and investors in the Western markets, especially in Europe and North America. In Asia, fine wine demand grew exponentially around 2005 when Greater China investors started to get more involved. This is especially after Hong Kong abolished duties for wine and beer in 2008, leading to a frenzy of activity among retailers and importers, eventually causing prices to skyrocket until 2011.
However, several factors torpedoed the market in mid-2011. This includes concerns over the euro, change of administration in China and worries about China’s economic growth. The market then corrected and consolidated before the rallies in 2017 and 2020.
While the demand from consumers and investors in Western countries continued, the same cannot be said for those in Asian markets, especially the all-important China. Jackson explains that Asia’s love for fine wine is relatively recent, only truly picking up around the mid- to late 2000s.
Fine wine appreciation among consumers in social settings is not as pertinent as in Western markets, defaulting to familiar drinks such as baijiu and sake. This means that the Asian markets did not see the same spike in demand-driving price performance during the pandemic period as seen in Western markets.
Jackson highlights that those who purchase fine wine in Asia have upped their average spend per bottle. Although Asian consumers drank less, they enjoyed splurging on higher-quality bottles. He adds that there is a removal of an entire demography of lower-value wines to include more of the investment-grade ones.
Champagne’s appeal
The wines that were most “in vogue” during the pandemic years were mainly ones that had dominated interest over the preceding few years, according to Cru’s Howard. These include top Champagnes such as Salon, Krug, Jacques Selosse, Crystal and Dom Pérignon as well as top Burgundies such as Domaine de la Romanée-Conti, Domaine Armand Rousseau and Domaine Leroy.
The first growths of Bordeaux (also known as premier cru classés) such as Château Lafite Rothshild, Château Mouton Rothschild, Château Margaux, Château Haut-Brion and Château Latour also remained popular among Asian collectors, aside from “super wines” of Bordeaux’s Right Bank such as Château Pétrus and Château Le Pin.
Although Champagnes have now been established as an asset class of its own, it has not always been the case. Traditionally, Champagnes were purchased predominantly for consumption, only accounting for 2% of the total secondary market trade.
In the late 2010s, however, Champagnes began to be bought, stored and resold for a profit. Supported by steady interest and market progression, Champagnes now accounted for 12.4% share of the secondary market, according to a September 2022 report by Liv-ex.
Today, Champagne is one of the best performing fine wines — Liv-ex’s Champagne 50 index, which tracks the price performance of the most recent physical vintages of the 13 most actively traded Champagnes, is up 58% over the last five years.
At an auction in July 2022, a magnum bottle of Avenue Foch 2017 Champagne was sold for a whopping US$2.5 million to Italian brothers Giovanni and Piero Buono. This was, however, primarily fuelled by the non-fungible token (NFT) frenzy at the time, as the bottle comes with an NFT that includes the digital art and intellectual property rights to an image of “Bored Ape Mutant”.
The transaction far eclipsed the US$558,000 bottle of 1945 Domaine de la Romanée-Conti at a Sotheby’s auction in 2018 to an unnamed Asian investor. Only 600 of such bottles were produced that year, after which the vineyard at the Burgundy estate was replanted.
Amphora’s Jackson says Champagnes have become a very important part of the firm’s portfolio over the past five years. However, he adds that this can be a double-edged sword, as unlike Burgundy and Bordeaux wines, Champagnes are made in huge quantities.
“By comparison, a producer like Dom Pérignon might make as many as 5 million bottles a year. Whereas a producer like Lafite Rothshild is only making 250,000 bottles a year while Romanée-Conti is only making 40,000. Investing in Champagnes should be approached cautiously due to the supply and demand dynamics,” says Jackson.
Diversification
As an asset class, there is far more interest in fine wine today than ever before, says Howard. This is attributed to two main factors, which are the concerns about inflation as well as greater awareness on how to acquire as well as manage fine wine and spirits for investment.
Similar to other asset classes, it is important for investors to diversify their wine investment portfolio to minimise risks and protect their assets from volatility. Investors can diversify their collections to include different geographies, vintages and winemakers, made possible by the depth and breadth of fine wine marketplaces.
“The biggest mistake an investor can make in fine wines is buying a case or two and hoping for the best — that is just taking a punt. Instead of investing in the ‘next big thing’ which does not enjoy a buoyant secondary market, they should adopt a broad portfolio approach that is able to perform in different market conditions,” says Jackson.
Howard concurs, adding that it is much easier to diversify fine wine investments than in most other luxury collectables. With cars, art and even luxury watches, collectors are usually dealing with high unit values — a vintage car, for example, will start at US$50,000 ($68,476). Fine wines, conversely, last up to 60 years and can be bought for less than US$1,000 a case.
It also helps that unlike other physical asset classes, fine wine generally does not suffer from liquidity issues — there are a number of trading platforms with published bids where investors can easily sell their collection, aside from other means such as auctions.
The caveat to fine wine’s typically liquid market is that as soon as investors go beyond the parameters of the most frequently traded wines, they would face an enormous illiquidity issue. While there is no easy solution to this problem, fine wine tokenisation may potentially help although the use of such technologies in the fine wine market is still in its nascent stage, says Jackson.
In 2021, digital asset technology group Sygnum teamed up with Fine Wine Capital to tokenise a range of investible fine wines, issuing the tokens on Sygnum’s Desygnate platform. The assets were issued under a new Swiss legal provision, which allowed Sygnum to develop a framework that links the ownership of financial and real assets to a distributed ledger technology-based token.
In Singapore, fintech firm ADDX had in November last year tokenised a vintage Burgundy wine portfolio by Provenance Treasures — the first luxury asset listed on its platform. Provenance Treasures is a subsidiary of Singapore Exchange S68 -listed Intraco I06 . The wines in the portfolio include Domaine Coche-Dury and Domaine Leroy, with half carrying the Grand Cru appellations.
Do-it-yourself
With the extensive amount of information easily available online, is it possible for serious fine wine investors to DIY (do-it-yourself) their own portfolios? After all, fine wine has a rich history as an asset class, with countless research reports; benchmarks and indices; critics as well as vendors and marketplaces.
While Jackson agrees that it is much easier to build a personal fine wine portfolio without any professional help today, he points out that there are several advantages to engaging managers such as Amphora. To start, the firm dedicates a significant amount of time and effort into developing quantitative analysis tools, which typical wine collectors do not have access to. This helps as the fundamentals to assess the value of certain wines are rather elusive given the asset has no cash flow and pays no dividend.
While it is possible to assess fine wine’s relative value, the vast diversity of the market makes it highly challenging — for example, one may find it difficult in comparing two different wines from different estates, produced in different countries in different vintages with dramatically different prices. Amphora’s tool allows the firm to compare the relative value, risk and financial potential of fine wines by processing market data such as critic’s scores, price history and volatility as well as optimum drinking age, among others.
Additionally, the firm is able to provide its clients with access to some of the rarest wines at preferential prices, says Jackson.
The Cru platform, on the other hand, offers three different routes for investors and collectors. First and most popular is the DIY approach due to its low cost and personal control. This allows Cru users to buy as little or as much as they like, aside from enjoying free access to Cru’s analytical tools and research reports. The second route is expert-assisted portfolios, where an expert tailors a portfolio specifically for a client. The last route is the managed portfolio product, where Cru’s traders manage the assets directly — buying and selling to realise trading returns.
Jackson says he is bullish on fine wine over the next 12 months following the market normalisation, continued demand and bright spots of opportunities in “less loved” wines such as certain Bordeaux bottles. He is also hopeful that there would be a resurgence of consumption demand among Asian investors, particularly among those in Greater China.
