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  Market Report January 2011 - 18th January 2011
By Thomas Gearing - Cult Wines Ltd -

Market Review 2010

The Fine Wine Market saw in the New Year in some style, with the benchmark index Liv-ex Fine Wine 100 having gained 40.5% in 2010. Whilst, the Liv-ex Fine Wine 50 Index rose by 57%, far outperforming other asset classes across the same period (S&P 500 index up 13% and Gold prices up 31%).

Fine Wine prices put in a substantial increase in 2010 and can in part be attributed to China’s ever increasing taste for the Top Bordeaux. Hong Kong’s status as the fine-wine capital of the world was reaffirmed, with the city selling more fine wine at auction than those in London and New York combined. The highlight of which being, Lafite’s first ex-Chateaux auction in late October which saw many cases trading at 2 and half times that of UK market price!

The large spike in prices for Mouton and Lafite 2008 can be attributed to an increase in demand following the announcement concerning the Chinese artist designing the Mouton Label, and the Chinese figure eight featuring on the Lafite label.

Market Outlook 2011

With Chinese New Year fast approaching (3rd February-year of the rabbit), the focus for Q1 will be on older vintages that are ready to drink. China’s taste for Bordeaux-particularly wines from the Left Bank should be re-affirmed. Older First Growth vintages will be in high demand along with wines such as Lynch Bages, Duhart Milon and Cos d’Estournel.

Typically, rapid rising prices across the past 12months have led to anxiety that the top end of the market may be approaching a ‘bubble’. Whilst, I do not anticipate the returns of 100% + that we have witnessed for some wines in 2010, I would conservatively project returns of around 25-30% for the coming year. The re-emergence of the U.S. market will further add to the strain on supply of the Top Bordeaux Chateaux. With the continuing economic development of the BRIC countries it is only natural that we are witnessing a new influx of consumers for luxury goods such as Fine Wine.

Obviously, the returns of the 2008 vintage were never going to be replicated but I think a sense of realism has swept the market and people have re-adjusted their expectations rightfully. Returns of 20%+ per annum tax free are not only achievable in the long term but desirable by the investor. I would advise investors not to look to fine wine for a ‘quick buck’, instead view the market as a 3-5 year opportunity. The market fundamentals are very strong and will produce good capital appreciation across a medium/long term hold.

Picks for 2011

Low Capital Investment Wines

The growing importance of Lynch Bages in the Far East was highlighted by the volumes sold in 2010. The volume case (12x75cl) sales for Lynch Bages 2009 and 2007 were 393 and 375 respectively. This compared to Lafite Rothschild 2006 selling 665 cases – the most sought after wine in volume terms. We will continue to see Lynch Bages trade keenly across Q1, with the physical vintages being picked up for next month’s Chinese New Year.

Lynch Bages is particularly popular in Hong Kong, as in Chinese, it is called ‘Lan Chi Pat’, the name of a famous 20th century Cantonese opera singer. Lynch Bages owner Jean- Michel Cazes, a frequent visitor to the Far East, observes that "It is very important for a brand in China that the name be positive and also well-respected". Well fortunately enough for Jean-Michel, Lynch Bages is beginning to cement its place as one of the most popular Left Bank wines amongst Far Eastern consumers.

Recent months have seen many of the low capital wines outperforming their First Growth counterparts, such as Pavillon Rouge and Forts de Latour. The uptake has been strong with these wines in excessive demand for consumption in the Asian market and with ‘blanket’ prices across the sought after physical vintages, I would recommend Lynch Bages 2005 and 2007 and if you are looking at a 3-5 year window for investment- the 2008 and 2009 vintages.

Beychevelle has been singled out for growth potential, having picked up notoriety because the label features a Chinese dragon boat – a hugely important symbol in Chinese culture and crucially considered lucky (see below).

The table below shows how this shift in emphasis has seen the top of the performance charts dominated by ‘low capital’ wines. Price appreciation has been considerably over 100% for the past 12 months for the recent vintages of the second wines of the First Growths. Any discerning investor must include these stocks in a diversified portfolio to reap the best returns whilst buffering against volatility of any particular stock.)

As the table shows, both Beychevelle and Lynch Bages are showing early signs of growth potential in a similar to fashion to the likes of Pavillon Rouge, Carruades and Forts de Latour. Duhart Milon still offers value and growth whilst increasing interest in Haut Brion should see Bahans stock benefit.

First Growth

The ratio between off prime and prime vintages – shows the price discrepancy between the top vintages of each chateau against the lesser vintages. In the displayed graphs we have looked at the physical vintages since 2000.

We have rated the 2000, 2003 and 2005 vintages as Prime. The 2001, 2002, 2004, 2006 and 2007 vintages are Off Prime.

Over the last 24 months, the price ratio between prime and off prime vintages has narrowed. The pace at which the gap has narrowed has accelerated, with a 20 point shift in the first 10 months of 2010 compared to just a 10 point shift in 2009.

This trend has resulted from the buying patterns of the new emerging wine market of mainland China, Hong Kong and the rest of the Far East. Bordeaux Fine Wine is seen as a brand such as Rolex, Cartier or Louis Vuitton – where the quality and singular points difference in vintages aren’t as important as the price.

Whilst we don’t expect to see ‘blanket prices’ for the first growths – a trend which can be seen in the second wines – we expect the price ratio to decrease another 20-30 points over the next 12 months. The data therefore shows that there is value in purchasing both off-prime vintages of Latour and Margaux – as these two Chateaux currently show the greatest discrepancy in price of 156.3 and 153.2. Whilst with Mouton at 77.3 – there is more value in the PRIME vintages.

Unsurprisingly Lafite Rothschild continues to lead the other first growths in terms of performance, with the number one fine wine in Asia close to showing a 75% appreciation in prices across the physical vintages. The trend for buying off-prime vintages was certainly seen first in buying patterns for Lafite and with Lafite 2006 one of the most traded wines of last year. The 2009 vintage, despite its high release price has shown a positive return for those who purchased at first opportunity, so there will no doubt be just as much interest in the 2010 vintage which is shaping up to be another fantastic year.

There is little surprise that Haut Brion carries up the rear, but the ‘unfavoured’ first growth is certainly closing the gap and showed solid returns of 25% for 2010. It is believed that Haut Brion is second only to Lafite in terms of unit sales in Hong Kong, which will no doubt put stress on already overworked supply – which will no doubt manifest itself in higher prices.

Since the quality of Haut Brion is unquestioned, it seems only a matter of time before the gap in performance is closed. We recommend the 1990 and 1998 which are both entering a period of optimum drinking—at which point demand rises and supply falls. The 2003 vintage also looks particularly undervalued considering the quality of the year and its RPJ score of 95 pts.

2010 En Primeur

Philip Gearing (Director) and Thomas Gearing (Director) were lucky to be out in Bordeaux during the harvest – and there is no doubt the conditions throughout 2010 will produce a fantastic vintage. The grapes were smaller than usual – however decent rainfall in late September and early October provided a last minute boost to the harvest. I would tentatively suggest that this vintage will be similar to 2003 – in terms of highly concentrated wines – but I feel the weather conditions were not as harsh this year as they were in the summer of 2003, so a vintage that falls between the 2003 and 2005 would be a fair assessment at this stage.

No matter how you look at it, 2010 will be considered another very good vintage if not great. The last three years bear a striking resemblance to the trilogy of vintages in the late ‘80’s: 1988, 1989 and 1990. Once again, demand for these wines during en primeur season will be high – but whilst prices are high there is always value to be found but they are certainly harder to identify!

Once again, we shall be fighting tooth and nail for strong allocations of this year’s vintage – and will be open for wish list applications upon return from the tastings in early March.

Response to IMF report

Click here to read the IMF Report

Having had the opportunity to look over the IMF’s report comparing the Fine Wine and Oil markets, I think that there are some merits to the assertion that there is a correlation between fine wine and oil, and an increasingly close correlation of both of these "asset classes" to emerging market GDP growth. However, I think their claim that there is a 90% correlation is far too strong. Indeed, there have been many comparisons drawn between the behaviour of Gold and Wine in the past, and if you base wine as a value of gold - then fine wine shows itself as a store of value (Liv-ex research). During the recent recession Gold and Wine have shown remarkably similar recession-proof traits.

Also, it didn't need a 19 page IMF report to tell us that fine wine had a correlation to increasing GDP. As a highly desirable luxury good - wine will attract itself to increasing wealth and always has done. The fact is that the first growths of Bordeaux have long been a barometer of world power. From the eighteenth century they were bought by English aristocrats, and then by the nouveau riche of the Industrial Revolution. Currently, as world economic power shifts (China has 800,000 millionaires) the market for fine wine has followed.


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