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Fine Wine: “Speculation is dead. Long live speculation”.

HKTDC Wine Fair. Industry Conference. 6th November 2014.

James Miles, Co-Founder and Managing Director, Liv-ex Ltd

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Introduction

• The wine speculation paradox

It is much frowned upon and deeply entrenched

• The fine wine cycle

Bottoming out?

• Opportunity knocks?

Some insights worth further exploration.

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Healthy friction between wine 'creatives' and 'suits'

• “Two Centuries of mistrust” between the Chateaux & Negoce.”

Benjamin Lewin MW, What Price Bordeaux?

• Of a leading Courtier, a “Vulture” with “cruel claws”

Lamothe, manager at Latour in 1812.

• Of the negoce “Something resembling a Cosa Nostra in embryo”

Francoise Mauriac in a novel in the 1920s.

• “The interests of proprietors and negociants rarely coincide”

Comte Lur Saluces owner of Chateau Yquem in 1960s.

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Speculation, boom and bust has a long history

Ancient Greeks, Egyptians, Phoenicians and Romans were all big traders of wine

UK wine merchants in the middle ages

were amongst the biggest lenders to the

crown. Charles II had Haut Brion in his

cellar in 1660.

Speculation took off with invention of bottles and corks in

18th century.

Herman Cruse, a negociant, bought 90% of the Bordeaux

crop in 1847 as revolution threatened in Europe.

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A few more facts

• In WW2 prices boomed rising 600% and then fell 50%+ post war.

• 1973-5, 1980, 1990-92, 2003 and 2011-14 – prices dropped by 20%+

• 1975, 2,000 cases of Mouton 70 sold at £74 each. 1980 it was £990

• Academic research* estimates fine wine (after storage and insurance costs) returned 4.1% per annum in real terms between 1900-2012– Art 2.4%, Stamps 2.8%, Bonds 1.5%, Equities 5.2%.

• A 2012 survey by Barclays found that 25% of high net worth individuals had a wine collection. Wine accounted for 2% of their wealth.

* The Price of Wine by Dimson, Rousseau and Spaenjers, 2014.

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Fine Wine over the last 25 yearsLiv-ex Investables Index vs gold, property and equities

3% 4% 5% 6% 7% 8% 9% 10% 11% 12%0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

LIV FWI Gold FTSE 100 Halifax Index

25 year Compound annual growth rate

An

nu

alis

ed

sta

nd

ard

de

via

tion

Ris

k

Return

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The last decadeFirst Growths rose 4.5x between 2005-11. Only to fall 41% between 2011-14

0

100

200

300

400

500

0

100

200

300

400

500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Liv-ex Fine Wine 1000 Liv-ex Fine Wine 50

1. UK pension reform2. 2005 release3. Wine fund boom4. HK removes duty5. Lehman collapses6. China Y4tr stimulus7. 2009 released8. 2010 released9. PRC “gift giving” ban10.1st rise in 16 mths

1 2 3 45

6

7

89

10

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Wine Prices below trendLiv-ex Investables Index – 2 & 5 year Returns

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Bordeaux at lowest % of Liv-ex trade in a decade

75%

80%

85%

90%

95%

100%

10%

20%

30%

40%

50%

60%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

First Growths (% of Liv-ex Trade) Bordeaux (% of Liv-ex Trade) - RHS

Firs

t Gro

wth

Tra

de a

s %

of L

iv-e

x To

tal

Bor

deau

x T

rade

as

% o

f Liv

-ex

Tota

l

10

Fine Wine versus other assets

Source: Bloomberg

Liv-ex 100

S&P 500

Manhattan Property

US Bond Yield

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HK Fine Wine Imports recovering?

-50

0

50

100

150

200

200

250

300

350

400

450

2007 2008 2009 2010 2011 2012 2013 2014 YTD

HK Wine Imports from UK (Chg %) - RHS LX50 Index (Year End Close)

+8% YTD

HK

Win

e im

port

s fr

om U

K %

cha

nge

LX50

Inde

x ye

ar e

nd c

lose

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En Primeur - A Buyers’ market beckons?

Ex Chateau Price as % of Market Price at delivery

0

20

40

60

80

100

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Chateau Profit Supply Chain Profit (ie negoce, trade and consumer)

20 year average = 57%

• In recent vintages lion’s share of profits have gone to the Chateaux.

• After 3 failed campaigns balance sheets in Bordeaux are stretched

• Young Bordeaux is a buyers’ market

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A bear market for Bordeaux rather than fine wineLiv-ex Fine Wine 1000 sub-indices – since market peak

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Domaine Romanee Conti (DRC) – Looking exposed?

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

100

110

120

130

140

150

160

170

180

190

200

2010 2011 2012 2013 2014DRC Share of Liv-ex Trade % - RHS DRC Index rel to LX 50 Index

DRC relative to First Growths and Trade Share on Liv-ex %

• DRC has outperformed First Growths by nearly 100% since 2010.

• But trade in DRC on Liv-ex is down 60% in 2014

DR

C s

hare

of L

iv-e

x T

rade

%

DR

C In

dex

rela

tive

to L

iv-e

x 50

Inde

x

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First Growths at depressed levelsFirst Growth Prices: Last 10 years

0

100

200

300

400

500

600

700

800

900

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Haut Brion Lafite Rothschild Latour Margaux Mouton Rothschild

Post Lehman Lows

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First Growths – Price v Score

3,500

4,000

4,500

5,000

5,500

6,000

95.00 95.20 95.40 95.60 95.80 96.00 96.20 96.40 96.60

Average Price vs Average Score

Latour

Lafite

Mouton Margaux

Average

Expensive

Haut Brion

Cheap

* Last 5 Vintages

*

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Parker’s Magical 20“Wines of First Growth Quality” which are “undervalued and very smart acquisitions”.

0

5

10

15

20

50

100

150

200

250

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

M20 Share of Liv-ex Trade % Magical 20 Index - LHS

AngelusClos FourtetConseillanteCos d'EstournelFleur PetrusHaut BaillyLeoville Las CasesLeoville PoyferreLynch BagesPalmerPichon BaronPichon LalandePontet CanetSmith Haut LafitteMalescot St ExuperyPape ClementRauzan SeglaTrotanoyGayBrane Cantenac

Magical 20 Index versus Trade Share on Liv-ex %

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To Conclude

• The ancient speculative cycle is set to continue

• Speculation plays a vital role in the fine wine market:– Facilitates price discovery– Generates liquidity– Helps growers finance their crop– Motivates growers to make age worthy wines

• The Bordeaux market is at its lowest ebb since the 70s, as then now might be a good time to enter the market.

• Value is likely to be the main driver of prices in the early stages of recovery.