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Liv-ex Director James Miles discusses the advantages and limitations of fine wine as an alternative asset class. He also outlines recent market trends and shifts.
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James MilesDirector, Liv-ex.com
The Fine Wine Investment Market – An Inside View
Saturday 5th November 2011Hong Kong International Wine & Spirits Fair
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What is Liv-ex?
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Liv-ex is the global exchange for fine wine merchants.
400 members in 33 countries Global marketplace
Price data, info and analysis
Storage & transport
Our customers account for 85% of world market.
A potted history
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• 2,000 years ago: Vines first planted in Bordeaux
• 900 years ago: UK becomes major export market for Bordeaux wine
• 350 years ago: Samuel Pepys first refers to a wine called “Ho Bryen”
• 150 years ago: Bordeaux 1855 classification
• 33 years ago: Wine Advocate first published
• 11 years ago: Liv-ex launches
The role of speculation
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• Wine is for pleasure but investment and speculation have always played a crucial role.
• They facilitate price discovery and liquidity and help producers to finance their crop.
• Transparency, driven by the internet, has democratised the market in the last 20 years, transforming it into a credible asset class.
5
Today’s market
Merchants
Auctions
Other
Hong Kong
US$3.6b
US$408m
US$245m
US$163m
• Is worth US$4bn per year.• Merchants account for 90% of trade.• New markets have led to strong growth.
How to define fine wine?
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• A wine with:
o Secondary marketo Ability to improve in bottleo Long track recordo Critical acclaim
• For investment purposes, this means the 25 top Bordeaux chateaux and a handful of others.
• Eight wines account for 80%+ of leading wine funds’ portfolios by value.
Bordeaux wines accounted for 95% of Liv-ex trade in 2010.
The five First Growths account for 52% of Liv-ex trade by value.
Factors that influence price
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Factors that influence price
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In the last few years, the key influence on price has been China.
Economic conditionsNew markets
Vintage qualityCritical opinionBrand
Emerging market influence
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The investment case
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• Compelling supply/demand dynamic
• CAGR 14.7% over 20 years
• The best performing of the “SWAG” assets over a 20-year period
• Useful portfolio diversification characteristics
Best in class
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SWAG:
Silver
Wine
Art
Gold
Wine is the best in class over a 20-year period, combining high returns with low volatility.
No panacea
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• Low Liquidity – The market is small and dealing costs are high.
• Opportunity costs are high – Wine generates no income.
• Structural weaknesses – The post-trade infrastructure is antiquated and risky.
• Regulation – The market is not independently regulated and is still very immature.
• Emerging market exposure – Current buying is heavily concentrated in HK & China.
A correction underway
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On the turn:
After three years of uninterrupted growth, the market is down 15% in three months.
Lafite drives the market up...
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Lafite Rothschild was the main driver of the market, vastly outperforming its First Growth peers in the five years to June 2011.
...and down
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Since then, Lafite has also led the market down, with all recent vintages decreasing sharply in price since the summer.
A buying opportunity?
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Where next: The “Magical 20”
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A further broadening: DRC
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Conclusion
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• Fine Wine is now well established as an alternative asset class.
• The fate of the market seems likely to remain closely aligned to changing tastes in China.
• Could the value lie in the “Magical 20” or regions outside Bordeaux as the Chinese market seeks out a broader universe of wines?
Please visit us at stand 3D-B26.
Or visit our HK mobile site: www.liv-exhkiwsf.com