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11/09/2018

Fine Wine Fundamentals: Bordeaux (City AM column)

by Giles Cooper (Head of Marketing & PR)

Bordeaux has always been the cornerstone of fine wine investment. Understanding this goes a long way to explaining the key dynamics of fine wine investment.

As with all investments, fine wine prices are heavily influenced by supply and demand. Unlike the mass market wines we see on the high street, fine wine operates with a structural market shortage. Due to legal limitations on production, the few truly great terroirs (places where vines grow best), and the relentless pursuit of quality, the amount of genuinely fine wine produced is limited.

As little as 30 years ago fine wine was rarely seen outside its traditional markets of Europe and North America. Over the last 15+ years however the fast growing market economies of China, Taiwan and Indonesia – previously of low significance in the context of the fine wine market – have all established themselves as key players. Indeed today they are amongst the most important consumers and investors.

The fine wine trade is now therefore truly global with the growth of Asia, driven by growing appreciation, collecting, and – critically – consumption, joined by a return to form of the US market; in addition the deep-seated passion of the European markets has remained, increasing overall demand but measurably reducing supply.

Furthermore, whilst the wine itself is maturing in temperature-controlled secure warehouses and cellars throughout the world, it is also improving, thus making it more desirable for owners and collectors. Therefore accompanying the increasingly skewed supply-demand balance over the asset’s life, the product is actually becoming more desirable for consumption.

Overall, this combination of finite and diminishing supply alongside increasing desirability and demand is extremely rare in investment markets.

So why is Bordeaux so fundamental? There is no other wine region globally with a proven track record of producing wines of such exceptional quality in a volume that allows for a market of high liquidity.

The Bordeaux First Growths (Haut Brion, Lafite Rothschild, Latour, Margaux and Mouton Rothschild - the five top wines as judged in the 1855 classification of Bordeaux) may produce in the region of 10,000 cases each, per annum, of critically-acclaimed quality. This means there is enough stock for most Bordeaux wines to be tradable on BI’s two-way LiveTrade market-making screen, establishing firm, executable prices and providing the all-important market liquidity.

The potential gains in Bordeaux are, of course, significant. For example Château Margaux 1990 was released in 1991 at around £1300 per case but now trades on our LiveTrade screen 10x higher at £13,100 (midprice). Removing the modest lifetime cost of storage (£250), this implies an annualised return of 9%. This is a long-term example, but we see similar and indeed larger gains on a much shorter term horizon.

So Bordeaux is the first place to which new collectors and indeed new markets turn, making it ultimately the core of the wine investment market. However next week we’ll look in detail at a key market development from the last decade: the increasing number of wines from other regions – such as Champagne, Burgundy, The Rhone, Italy and the USA – now considered to be “investment grade”.

See below our previous City AM column:

1) Making Money Takes Bottle