Wine in the Crisis

Matthew Hall, First Republic Portfolio Manager, Spectrum

Since I last wrote about investing in fine French wines for SPECTRUM in March 2008, a lot has changed. The world suffered a massive financial dislocation, and many people saw their balance sheets turned upside down. It makes sense then, that wine prices were also affected.

When the “credit crunch,” began, the global fine wine trade was riding high. Prices of the best Burgundy and Bordeaux first growths had seen rapid appreciation with the 2005 Bordeaux vintage leading the charge. After the Lehman Brothers collapse, fine wine prices fell between 20% and 40%…significant, but far less than the decline in the S&P 500 over the same period.

“When you have fluctuations, you weather the storm, or start to drink, or buy more,” said New York collector David Weinstein in an article in the New York Times. Of the three, “buy more” is what wine collectors, dealers, and auctioneers are advising. Why?

The best Châteaux can only produce so much wine in a year, and the quality of the vintages is weather-dependent. The supply is relatively fixed, so the one true variable is demand, and in spite of the temporary slow down caused by the current economic problems, the demand curve is up.

One very significant change in the global fine wine market occurred in February 2008, when the Hong Kong government abolished the 100% tax/ duty on wines. As a result, Sotheby’s and Christie’s have both begun fine wine sales in Hong Kong, and the sales have been 30% ahead of the highest expectations. The star of Sotheby’s Hong Kong sale was a six-liter bottle of 1982 Château Petrus which went to a Chinese buyer for a record $93,077.

As China becomes more wealthy, its newly-rich citizens are demanding all the luxury goods that we enjoy here in the West. Wine is a primary beneficiary of this trend. And as we all know, the Chinese market is huge. (For example, according to a recent article in The Financial Times, Mercedes Benz S-Class sedan sales in China are now the company’s largest market, taking over from California, the former leader.) So with increasing demand from the emerging market countries—Brazil, Russia and India are also seeing big increases in fine wine sales—prices are likely to rise over time. The most knowledgeable collectors and dealers concur that this is a good time to stock up on the best vintages. While the 1982s and particularly the Château Lafites are already at new highs, many notable vintages remain below 2008 prices and some, quite significantly.

Perhaps this is a good time to add to your collection. Or perhaps, it’s a good time to open a good bottle and reflect, with gratitude, that the world didn’t end last year after all.

The views of the authors of these articles do not necessarily represent the views of First Republic Bank.