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The market for fine wine, (by that I mean collectables, the one hundred or so top wines from unique sites, with potential for long ageing) saw a boom at the end of the 1980s, a tumble in 1990, triggered by the oil crisis and a deep recession in the US and UK. Then a boom at the end of the 1990s, notably 1998, as fine wine collecting and drinking became fashionable with the rich of eastern countries like Japan, Singapore, Hong Kong and Tailand, with a collapse again in 1999, when these countries economies went into steep decline.
During these volatile periods some wines had more than doubled in value, only to fall back by a half or more during the 'bust' period. The canny wine investor buys in a bust period probably when there are signs of renewed growth starting, and sells in boom times. He also knows enough about the complex subject of wine as an alternative investment to know which stocks and vintages to buy and sell. A fool proof rule, proven time and time again, is that the biggest value increases occur when a stock becomes scarcer - you may say a glimpse of the bleeding obvious - but an investor needs enough antenae in the industry to know when scarcity is about to occur or is occuring. {mosgoogle}
The amature investor should also be extremely wary of condition and provenance, remember wine is a perishable, and a stock in poor condition is near worthless. That all said, where in this cycle are we now? From 2000 up until the late spring of last year the market was flat, with some distressed sales, in fact, on occassion showing value declines at auction and on some merchants lists. The only funds going into the market were for primeurs (new vintages about to be released) of the excellent 2000 and 2003 vintages, which generally were scooped up at high prices leaving little liquidity for the trading of other stuff. But by and large holders of top stock just sat tight and this was a period of sluggish liquidity. In the late spring of 2005 things started to move, particularly as there was a general shortage by then of mature stocks ready for drinking. This movement started to bring more sellers to the market and as we entered 2006 the prosperity in the financial and other markets started spilling over into wine, and in the current year there has been an increasing paucity of good stock. To start with the rarest wines like Petrus, Le Pin and Domaine de la Romanee Conti, started seeing big value increases, then top mature vintages particularly the best from the 1980's like 82, 85 ,86 89, and 1990. In the last month or two younger top wines like 95 and 96 and even 2000, have started moving up.
So where do we go from here? My reading is that, whereas previous booms were driven by a few large relatively novice buyers, partly overinvesting in everything with a name regardless, and merchants needing trading stocks, both with a speculatory motivation. This boom (I think we can start to call it that already), is different. The Eastern buyers are much more knowledgeable, and although they are now back in the market, they look for bargains.The important American market is still extremely buoyant, but wheras before they were acquiring stock from abroad, the US boom is now as much about internal trade in the USA amongst big and new collectors, hence the booming US auction market. But this has a lesser effect on overall prices as arbitrage costs are still high. In the last year or so we have also seen a few rich Russians discovering the joys of great wine, and I believe there is a long way for that group of super rich collectors to go.
Most significantly however, lurking on the horizon and starting to figure, are two new and potentially huge markets, China and India, which if they take off the way Japan did twenty years ago, could drive prices sky high. What is stopping this so far? In China it is that so far relatively few oligarchs are just discovering the subject and they tend to be much more canny and careful than some. Secondly the duty regime in China means taxation on imported liquor is paid on value (ad valoram), rather than alchohol content, at a rate of 85%! This is clearly a huge deterant to sales of the most expensive collectable wines, although the Chinese government have pledged to change this in due course. In the meantime, the number of importers is small, and there is evidence of smuggling , particularly from Hong Kong and Macau. As for India, this market is in its infancy, and could grow very significantly, but probably slowly rather than at a frenetic rush.
My prognosis then;- is the market overheating? Not yet, but it is probably going to at some stage, the timescale of which will depend much on new emerging markets. What will control this boom? Certainly a big and excellent 2005 vintage will take up some of the cash heading into the market as prices will be pretty high. Many of the existing collectors are far more canny and are sitting on large quantities of stock. I believe we are in for an interesting year or so of very active and buoyant markets- unless of course there is some mega global financial catastrophy such as an oil crisis, but that certainly isn't something I feel confident or qualified to comment upon!
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