Anyone with a wine collection of even modest size will most likely have noticed it increasing nicely in value over time. What you might not have given much thought to are the underlying drivers of this value gain. Equally, in observing the freefall prices of certain other investment assets in the early stages of the COVID-19 pandemic, attention may not have immediately turned to the impact on one’s wine collection. Yet recent months have again cast light on wine’s unusual resilience during such troubled periods – and driven significant further interest in wine as an investment asset.
Wine – along with other “collectible” assets such as spirits, art and vintage cars and watches – has an important underlying supply-demand dynamic which evolves in a favourable way across a wine’s life cycle. That is to say that there is a finite quantity produced, which decreases over time through consumption. At the same time, demand rises, due to factors such as a wine’s improvement with maturity and the global appetite for luxury-goods.
This may all sound very obvious, but it is hugely important when it comes to understanding wine as an asset: most significantly, it means that wine has significant upside potential, but generally much more limited downside risk. Often as a certain wine goes up in price, its rarity means such moves can quickly gather momentum (Domaine Armand Rousseau Chambertin has almost tripled in price in the last five years, for example). But given that wine is purchased for pleasure as well as for financial gain, every time prices move downwards, there is demand at the falling price levels to halt that decline.
As a result, it is not only significant that wine has delivered long term average investment returns of 10% per annum (well above equities, including their dividends). If you invested in wine at the start of any month in the last 15 years and held that investment for five years, you would only have lost money in 7% of instances. Put simply, wine delivers strong value gains, but also has very solid “wealth preservation” attributes.
Generally during a difficult period in the broader markets – the dot com bubble bursting, the global financial crisis, the Eurozone sovereign debt crisis – wine does not record significant gains, but merely holds its position. However, when an unprecedented crisis such as COVID comes along, even the most seasoned market-watchers wonder whether such patterns will hold true.
COVID was perhaps of particular relevance in this context: a pandemic which would actually make significant changes to the way people live and work, and therefore the way they interact with and consume luxury items. While every crisis is different, this one potentially seemed more different than most.
Tales of increased consumption of alcohol at home during lockdown are pretty tangential in their relationship to the fine wine market; there was certainly not a run on Lafite, DRC or Cristal as people were hunkered down. But there was an immediate impact in market trading volumes: demand from wholesalers and merchants dipped significantly as their end markets saw various lockdowns and other measures, while many collectors were perhaps distracted by global events and the associated impacts on their own businesses or broader assets.
In a market for physical assets – as wine is – periods of uncertainty often see corresponding reductions in inventory, i.e. wholesalers and merchants reducing stock levels to mitigate perceived risk. They tend to do this in the areas of the market which are most actively traded, which in wine is younger Bordeaux. As a result, such wines saw early dips in prices, often of around 10%, while prices for older Bordeaux and other regions remained largely static.
Even in the relatively isolated cases of young Bordeaux, however, lower prices “on screen” for a long-term investment do not equate to people losing money on a realised basis. Indeed on Bordeaux Index’s LiveTrade platform (which sees the most activity in the market) beyond certain trade players selling inventory, there was virtually no selling from collectors or investors. As soon as the short period of wholesaler and merchant selling faded, prices quickly moved back towards pre-COVID levels.
Across the first wave of the pandemic, a diversified fine wine portfolio would have been – on paper – down by a maximum of only 2% and would have actually registered gains of 3% across the year to date. In recent months, despite the second wave, we have seen extremely strong activity in Bordeaux across the vintage “curve”, with a healthy balance of Asian and European buying likely to be complemented in spring 2021 by a return of US demand as President-elect Biden reviews the tariffs on French wines. Meanwhile, Asian buying of Burgundy is also particularly strong, with many recent transactions of bluechip wines seeing returns almost to the 2018 highs.
All in all, COVID has so far once again demonstrated the resilience of fine wine in challenging market conditions. Now investors can look to the coming months and the potential for a resumption of upwards momentum.
Matthew O’Connell is head of investment at Bordeaux Index