Liv-ex Fine Wine Market Blog

Volume of transactions surges 23% YOY

Diversity has been a constant theme this month. Demand has spread to all corners of the market, lifting the volume of transactions on Liv-ex from a seven-month low in December to its second-highest level to date. Only October 2010 - when Lafite revealed that its 2008 vintage would feature a Chinese figure eight - overshadowed January in volume terms. Year on year, the number of transactions on the exchange is up 23 per cent.

The number of active markets on Liv-ex (i.e. wines that have both bids and offers placed against them) has also risen dramatically, while bid-offer spreads have tightened. These recent trends all underscore the secondary market's rapid development.   

The Liv-ex Fine Wine 100 and the Liv-ex Fine Wine 50 will be updated tomorrow afternoon. Will the benchmarks turn? Check back to find out. 

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Burgundy sets the pace

Trade on the exchange has encompassed a broad array of wines this month. As well as the usual bevy of Bordeaux, top labels from Burgundy have made buyers' wish lists and the region has accounted for seven per cent of monthly turnover. Of course, the Burgundy 2010 campaign has been partly behind the region's performance. To a larger extent, however, Burgundy continues to benefit from the general broadening of the market.

With demand now spanning a more varied group of wines, Bordeaux has accounted for just 87 per cent of turnover in January. The table below shows the month's most traded non-Bordeaux brands. As you can see, Comte Vogue has outpaced DRC this month - a signal, perhaps, that more of the region's leading labels are gaining traction in new markets.   

The road ahead

Fine wine was not immune to the global economic gloom in 2011. Prices fell rapidly in the second half of the year and the Liv-ex 100 Fine Wine Index declined 21.5 per cent. We noted in late 2010 that a price correction and a return to a more sustainable level of growth would be beneficial in the medium to long term. The severity and swiftness of the correction, however, took many by surprise. 

Lessons learned

Many of these falls were concentrated in the First Growths, which did not relinquish their dominance over the market. This is demonstrated in the chart below, which shows the performance and production value (i.e. average price x production) of the top ten labels by value traded on the exchange in 2011. It wasn’t universally bad news as many of the second-line wines and Petrus managed to end the year slightly up.  

With a weighting of 68 per cent in the Liv-ex Fine Wine 100 Index, the First Growths’ recent falls have clearly cast a long shadow on the market. And although the Super Seconds increased in value in the 12 months to December, their weighting is dwarfed by their higher-ranking cousins. 

A stabilisation in the price of the Premiers Crus is a prerequisite to recovery in 2012. For this to happen, of course, they must reach a level where they regain buyer confidence and are once again seen to represent value. Encouragingly, we are seeing nascent signs that some wines are re-entering the ‘buy zone’. The Liv-ex Fine Wine 50 has edged upwards since the start of the year, while the Liv-ex Claret Chip inched higher in the first and second weeks of January for the first time since late July. More importantly, the value of bids on the exchange has started to rise again after falling for six consecutive months. 

Positive triggers

Though the prevailing economic concerns continue to cast a heavy shadow, several scenarios could see the market find a floor in 2012.

An affordable 2011 campaign: The eurozone crisis and economic weakness could persuade the Bordelais to lower prices. If so, a well-priced en primeur campaign might reignite interest in Bordeaux, as it did in 2009 when the 2008 vintage was priced very fairly. 

A return to value: The sharp price falls that were recorded in the second half of 2011 equate to those seen in 2008 after the collapse of Lehman Brothers. For this reason, one has to assume that a heavy dose of bad news is already in the price. Even a modest turnaround in sentiment towards the First Growths could have a profound impact on confidence.   

High 2009 in-bottle scores: Robert Parker is expected to publish his in-bottle scores for the 2009 vintage in the next issue of the Wine Advocate. If his effusive Magic 20 tasting is anything to go by, the vintage’s scores may eclipse those of its forerunners, making it a ‘must have’ for collectors and strengthening interest in Bordeaux.

Easing of Chinese monetary policy: Over the last few years, China has been the driving force behind the market’s growth. As such, any moves to stimulate growth in China will certainly be cause for optimism.  

As we sit here today, the fog of negativity that has shrouded the market since the summer is showing tentative signs of lifting. Indeed, as we discovered in 2009 and 2011, sentiment can turn remarkably quickly.

Market breadth boosts trading activity on Liv-ex

Although the market has yet to commit to a direction, there are several reasons to be cheerful this year. Demand has broadened in recent months and is no longer heavily concentrated in the First Growths. Perhaps as a result of this, a more diverse range of wines is now in play, including top labels from outside Bordeaux. The total value of stock bid and offered on the Liv-ex exchange is up 20 per cent year on year. The number of wines that have both bids and offers placed against them has risen 68 per cent in the last 12 months and the bid-offer spreads have tightened. Unsurprisingly, then, the volume of weekly transactions is up 20 per cent year on year. With First Growth trade reduced, however, trade by value is down 15 per cent. 

The rise in the number of active spreads on Liv-ex is shown in the chart below.

Is the improved breadth and depth of the market encouraging more merchants to trade? Despite Chinese New Year celebrations, merchant engagement is at its highest level since September.  

Gong Xi Fa Cai: A return to prosperity?

Yesterday ushered in the Year of the Dragon - the most auspicious year in the Chinese lunar calendar. The dragon is one of 12 Chinese zodiac animals and symbolises power and prosperity. As The Economist pointed out on in a recent blog post, this could bode well for the stock market, which has started 2012 on a positive note. The Dow Jones Index has historically seen strong returns during dragon years. Can the same be said of fine wine?

To find out, we analysed the movement of the Liv-ex Fine Wine Investables Index between 1987 and 2010 and measured each animal year's average returns. As you can see, the pig - a symbol of peace and honour - was in fact been the best performer over this period. Nonetheless, the Year of the Dragon has coincided with robust growth in the past - a good omen, it seems, for 2012. 

Liv-ex Claret Chip crosses paths with Fine Wine 50

Those with a keen eye on market movements may have noticed that the Liv-ex Fine Wine 50 and the Liv-ex Claret Chip converged last week. The latter, which tracks high-scoring vintages of the First Growths, has historically outperformed its sister index. In recent years, though, demand from Asia has altered the relationship between the two benchmarks.

Five years ago, critical opinion was a key factor in determining how well a wine would perform on the secondary market. From 2008 onwards, however, demand from brand-conscious Chinese buyers boosted the value of more affordable First Growths, and Parker scores became increasingly irrelevant to price performance. As a result, the gap between the indices narrowed from 16 per cent in August 2006 to less than one per cent at the height of the market last year. The Liv-ex Fine Wine 50 traded places with the Claret Chip in July and maintained its lead in the third and fourth quarters of 2011. 

This year, the Claret Chip has caught up. Could perceived returns be connected to quality in 2012?

Acker wine auction serves up mixed results

The Acker auction in Hong Kong last weekend sold just over 90 per cent of its lots, bringing in a total of £5.6 million. Although several super lots set new records, the overall results were unremarkable. 

The First Growths fetched slightly higher prices at Acker than they did at the Sotheby's sale in Hong Kong on the 14th. Buyers shelled out an average of six per cent more than the Liv-ex Mid Price (our trade-to-trade transaction price) for post-millennial vintages of the Firsts - if we include a buyer's premium of 22 per cent. From a seller's point of view, however, the results were disappointing. On average, hammer prices were 13 per cent below market, with some wines selling for significantly less than their current trading prices. 

All prices have been converted to GBP and are for 12x75cl cases. BP=Buyer's Premium

But what of Bordeaux's second-line wines, which outpaced their higher-ranking peers in the latter half of 2011? In general, demand for the Super Seconds and Flying Fifths was subdued. As you can see from the table below, Montrose 2003 was the best performer, while Leoville Las Cases failed to inspire Asian bidders. The brand's 2006 vintage fell under the hammer at a 42 per cent discount to its market value.  

All prices are for 12x75cl cases.

DRC's performance is somewhat open to interpretation. On the plus side, buyer's were willing to part with up to 28 per cent more than the Liv-ex Mid Price for younger vintages. Conversely, if we remove the buyer's premium, vintages from 1995 onwards sold for an average of 11 per cent less than their current market price - bad news, of course, for the sellers. 

Burgundy 2010 campaign off to a promising start

Last week, fine wine merchants and traders attended a series of Burgundy 2010 tastings in London. Initial reactions to the vintage have been exceptionally positive, with Allen Meadows (aka Burghound) noting that the wines could in fact be superior to their 2009 counterparts. This is particularly surprising given the challenging weather conditions that growers faced in 2010. 

Meadows suggests that the wines are notable for their refinement, balance and great sense of energy:

"It’s one thing to have racy acidity and punch but it’s another to ally these attributes with real substance. And this is what the 2010s do with such brilliance." 

The table below shows his top picks of the vintage. 

Whilst many growers overcame the elements and produced "genuinely excellent" wines, yields were down between 30 and 40 per cent on 2009. As a result, stock is in limited supply and buyers may need deeper pockets this year. 

Many of our trading members have reported modest price rises of five to ten per cent across all quality levels. Of course, where vineyards (and hence production) were severely affected by the adverse weather, increases can be as high as 40 per cent. Despite this, merchants maintain that the market has absorbed the price hikes "with little if any resistance". All of the fine wine traders that we spoke to said that demand for the Premier Cru and Grand Cru reds was outstripping supply. According to one merchant, "Price is definitely not the problem. Because yields were so low, not enough stock is available." Buyers who have not been able to secure allocations will have to hunt for stock on the secondary market, where prices are likely to rise quickly. 

Interestingly, anecdotal evidence suggests that there has been a strong rise in demand from Asia this year. "In Hong Kong five years ago there was no recognition [of Burgundy]," said one leading trader. "Now it's something that people are incredibly excited about. Buyers are bored with Bordeaux."  

Interest from Asian clients (who are reportedly a mix of speculators and collectors) appears to be concentrated in the high-end wines, including those of Roumier. As noted last week on the blog, Asian buyers are increasingly favouring Burgundy's top labels. This was clear at the Sotheby's auction in Hong Kong on Saturday, where Bordeaux suffered but Romanee Conti sold at a premium.

Super Seconds underperform in Hong Kong

Auction rooms in Hong Kong opened their doors over the weekend for two major sales. The Acker auction on the 13th and 14th of January achieved a total of £5.6 million, having shifted around 90 per cent of the lots. Bidding was slower at the Sotheby's sale on Saturday, where just 85 per cent of the lots found buyers. The auction failed to match its pre-sale estimate and raised a total of £3.7 million. 

Over the last few months we have noted that demand for top Bordeaux has receded. This was clear at the Sotheby's sale on Saturday, where numerous Bordeaux wines went unsold. On average, First Growth vintages from 2000 onwards were sold at a 17 per cent discount to Liv-ex transaction prices (if we exclude a buyer's premium of 22.5 per cent).

Although the Super Seconds have outperformed the fine wine market since June, they also met a cool response at auction. At the Sotheby's sale, Leoville Las Cases, Leoville Barton and Montrose all fetched prices well below their current market value. Winning bids for recent vintages of Leoville Las Cases were up to 53 per cent below trading prices, while those for Montrose were up to 38 per cent below market.

But where Bordeaux's biggest names came up short, DRC continued to shine. Romanee Conti 1988 held on to its value, selling at just under £79,000. At £126,150, a 12-pack of Romanee Conti 1990 was the most expensive lot of the day and sold at a seven per cent premium to its market price.

The table below shows the Sotheby's hammer prices and Liv-ex trade prices of selected wines, including post-millennial vintages of the First Growths. All values are for 12x75cl cases.

Plese note that Liv-ex trade prices do not include merchant margins and represent the prices merchants could expect to achieve when selling wine on the secondary market. Because we are approaching the auction results from a seller's perspective, and the buyer's premium does not go to the vendor, we have used hammer prices for our analysis.