At the beginning of 2015 The Wine Investment Fund published a forecast that the fine wine market would return +9% this calendar year, as measured by the benchmark index, the Liv-ex 100.
2014 saw wine prices fall for an unprecedented fourth year in a row. However, the negative returns were concentrated in the first 7 months of the year, with August-December actually seeing a rise in the Liv-ex 100 of 2%.
As well as better headline returns, the market’s underlying fundamentals also showed signs of improvement towards the end of 2014. Specifically:
- There is considerable pent-up demand after a long period of price declines, from both merchants (for restocking) and from investment entities (for committing funds). This was evident from the sharp price rises of wines from the 2005 vintage after a critical upgrade late in the year: when market participants have a reason to buy, serious money is being committed.
- While demand from China for gift giving, etc. has fallen, the number of genuine and knowledgeable consumers is continuing to grow as the market there continues to mature. This demand will be more stable and more enduring.
- The long downturn since mid-2011 was partly due to speculative demand, built up in the 2009-2011 bull run, exiting the market. All, or least the vast majority, of these sales have now been completed.
Put simply, prices are now cheap. The index is a long way below its trend line (see Figure 1) and prices are at levels which have finally attracted back buyers from traditional markets (Europe, North America).
Outlook for 2015 and progress to date
At the start of the year our central forecast for the change in wine prices in 2015, as measured by the main index (the Liv-ex 100), was +9%. However, recognising that a forecast is unlikely to be exactly correct, we produced a fan chart which shows a range of possible outcomes and the likelihood of them being met. This fan chart is shown in Figure 2 below.
The chart suggests that there is:
- a 60% chance of growth in 2015 between +2% and +16%;
- a 30% chance of growth between -4% and +2% or between +16% and +24%;
- a remote chance (10%) of growth being either below -4% or above +24%.
These probabilities were based on market conditions at the end of 2014, as described above, and the following expectations for 2015.
We expected the year to start strongly, with a late Chinese New Year (the main annual holiday for more than a quarter of world’s population) fuelling demand throughout January. Conversely, though, we forecast that February and March would be quiet, with the Chinese holiday itself and then a pause while participants prepare for the 2014 en primeur campaign, when the latest Bordeaux vintage is released for sale.
The en primeur tastings take place in April, with the releases themselves in May/June. This introduces some uncertainty into the path of prices, as the market as a whole could be affected by the reviews of the vintage and on how attractively priced it is. Our central prediction is based on a decent vintage (not stellar, but better than average) and a well-priced (but not giveaway) campaign: if prices are too expensive the market could fall back a little; if prices are lower than we expect it could provide a ‘shot in the arm’.
As usual, the summer holiday season in July and August is likely to be quiet. Thereafter, as with 2014, we expect to see a positive end to the year.
Since we first published these predictions we now have data for the first two months of the year, and we have included the actual index returns as the green line on the above chart. So far, prices have performed much as we anticipated.
Factors to watch
Wine prices could be sensitive to a number of external developments during 2015, of which the key ones are:
- The level of sterling, particularly against the US dollar. Over the last couple of years this has been a significant influence on fine wine prices, with a weaker sterling leading to rises and vice versa.
- Economic conditions, particularly for those towards the top end of incomes globally. A recent UBS survey showed that the number and net worth of the wealthiest continues to grow, but the economic environment remains uncertain.
Importantly, though, downside risk is limited by wine being a consumable good which those with disposable income will drink. Many indications suggest that, for example, first growths do not fall below around £200 per bottle in decent vintages (obviously the floor is higher in great vintages). With many wines at or close to this level, the ‘floor’ provided by drinking demand from traditional markets could keep prices from falling further.
The physical nature of wine also means it attracts demand – like gold – as a hedge against uncertainty. This is as relevant as ever in today’s world, with risks arising from e.g. the Eurozone, terrorism, the situation in Ukraine etc.
It is very possible that we are at the beginning of an upswing in fine wine prices. However, the key point is one we have been making for nearly a year. That is, looked at from a few years’ hence the exact turning point will not be particularly important; what matters is that the current period (the last few months, and the immediate future) will look like having been an exceptional, and very attractive, buying opportunity.
After two months the market has performed very much in line with our expectations. We therefore retain our overall forecast of 9% growth for 2015. We also still believe that the reasons to be positive about the future path of fine wine prices seem stronger than the reasons to be cautious.
Andrew della Casa, is director at The Wine Investment Fund