Wine & Spirits Investment in 2021: Out with the Old; In with the... Old
5 January 2021
In our last article we wrote in detail about the resilience of wine across the Covid crisis, during a period when many other asset classes saw significantly disrupted performance.
There is a sometimes ironic reaction from investors when observing performance like this: they admire wine for its low correlation with other assets and its inherent wealth preservation characteristics, but then wonder why in a year like 2020 the asset has not been more interesting!
Certainly the relative uneventfulness of the wine market in 2020 "did exactly what it said on the tin". However, we expect the picture looking ahead to 2021 to be rather different. As a headline summary, we see the potential for breakthrough performance in certain regions – Bordeaux and Burgundy – with this potentially spilling over into other areas. Other regions which have seen greater interest over the last couple of years may see a more fallow period. Brexit has seemed to be a dark cloud over everything for almost half a decade now, but aside from some friction and logistics issues for wine merchants, it is not something we are currently losing much sleep over in an investment context; anything causing significant disruption for Asian trading would likely be much more impactful.
The Wine Market
The wine market does not see a steady increase in prices year on year; rather we tend to see +20% type years (sometimes in succession) and then broadly flat periods. This is driven by various factors, but it ultimately boils down to the supply-demand balance, which once tipped, can move quite fast, but often requires a "build up" of pressure against prevailing market prices to begin with.
As a result, we are always acutely focused on availability of stock in the market at prevailing price levels, something we have particularly strong insights on, given our LiveTrade platform is the most active trading venue in the wine market. In H2 2020, there has simply been a constant shortage of stock at the prevailing market levels, most markedly in top Bordeaux. While this has not yet seen prices move significantly, we expect – all being equal – this only to be a matter of time.
If supply at prevailing prices is low, what is the demand-side driver tilting the balance in that direction? Asia buying has seen a strong resurgence (across the region, not just China), but European demand is also favourable. Burgundy is an interesting example of this, where one sees significant "stretching" of prices prior to the sort of dramatic price activity we saw across 2016-2018. In recent months we have sold certain "blue-chip" Burgundy including Rousseau and Cathiard grand crus at record prices – indeed trading volumes for red Burgundy have been around double that which we saw for the second half of 2019.
There are two factors which could well "tip the balance" in the early months of 2021 for these two regions: firstly, the potential removal of US trade tariffs in February; and secondly short-term logistics issues related to Brexit. While US trade tariffs (which in simplest terms applied to Bordeaux and Burgundy, but not Italy and Champagne) have hardly been a stone around the neck of wine prices for the affected regions, there is no doubt they have not helped the demand side – our expectation is that the Biden administration remove these and it is just a question of timing for that removal. On the Brexit side of things, sourcing for rare Burgundy is pan European, but sales to Asia are primarily via the UK wine trade (given London is the core European fine wine trading hub), such that if movement of wine into the UK is slower than usual, then prices of the rarest items are the ones which will be squeezed upwards the soonest.
If there is particular potential for Bordeaux and Burgundy in 2021, what regions are less exciting in their outlook? Italy and Champagne have both benefited in the last couple of years from the (lack of) US trade tariffs but also from the release of strong vintages – the 2015 and 2016 pairing for Italy; and 2008 for Champagne. It is not that these regions are likely to see price falls in 2021, but it is certainly less obvious where the catalysts for significant price upside is. For both, we expect that slightly older vintages (perhaps 2009/2010 for Italy and 2002/2004 for Champagne) would be the best places to invest, while also having an eye on scarcity when picking specific names (e.g. Solaia is relatively lower production in a Super Tuscan context, just as Cristal is for Champagne).
Where are the downside risks in wine in 2021? As we alluded to above, Brexit comprises more of a logistics problem, than it being ultimately core to wine prices. Covid has proven to be unimpactful for wine – the idea of the macro recession having a "lagged" effect on prices seems unaligned with what we are seeing in the market and indeed what we have seen in the past. Perhaps the biggest threat to wine prices – or certainly wine prices going up – would be if we saw a resurgence (in greater magnitude) of political problems in Hong Kong given that in the second half of 2019 this did impact Asian wine trading and caused a stall in prices.
Although saying that Bordeaux will be the next big thing in wine seems like a somewhat unoriginal message, we nevertheless think it is the core theme to watch in the new year – very much a case for 2021 of Out with the Old, In with the Old......