Liv-ex Director James Miles' presentation on "Speculation is dead. Long live speculation", delivered at the Hong Kong International Wine & Spirits Fair Trade 2014.
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James Miles of Liv-ex at the Wine Industry Conference, HKIWSF 2014
1. Fine Wine: “Speculation is dead. Long live speculation”.
1
James Miles, Co-Founder and Managing Director, Liv-ex Ltd
HKTDC Wine Fair. Industry Conference. 6th November 2014.
2. 2
Introduction
• The wine speculation paradox
It is much frowned upon and deeply entrenched
• The fine wine cycle
Bottoming out?
• Opportunity knocks?
Some insights worth further exploration.
3. 3
Healthy friction between wine 'creatives' and 'suits'
• “Two Centuries of mistrust” between the Chateaux & Negoce.”
Benjamin Lewin MW, What Price Bordeaux?
• Of a leading Courtier, a “Vulture” with “cruel claws”
Lamothe, manager at Latour in 1812.
• Of the negoce “Something resembling a Cosa Nostra in embryo”
Francoise Mauriac in a novel in the 1920s.
• “The interests of proprietors and negociants rarely coincide”
Comte Lur Saluces owner of Chateau Yquem in 1960s.
4. 4
Speculation, boom and bust has a long history
Ancient Greeks, Egyptians, Phoenicians and
Romans were all big traders of wine
UK wine merchants in the middle ages
were amongst the biggest lenders to the
crown. Charles II had Haut Brion in his
cellar in 1660.
Speculation took off with invention of bottles and corks in
18th century.
Herman Cruse, a negociant, bought 90% of the Bordeaux
crop in 1847 as revolution threatened in Europe.
5. 5
A few more facts
• In WW2 prices boomed rising 600% and then fell 50%+ post war.
• 1973-5, 1980, 1990-92, 2003 and 2011-14 – prices dropped by 20%+
• 1975, 2,000 cases of Mouton 70 sold at £74 each. 1980 it was £990
• Academic research* estimates fine wine (after storage and insurance
costs) returned 4.1% per annum in real terms between 1900-2012
– Art 2.4%, Stamps 2.8%, Bonds 1.5%, Equities 5.2%.
• A 2012 survey by Barclays found that 25% of high net worth individuals
had a wine collection. Wine accounted for 2% of their wealth.
* The Price of Wine by Dimson, Rousseau and Spaenjers, 2014.
6. 6
Fine Wine over the last 25 years
Liv-ex Investables Index vs gold, property and equities
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
0% 2% 4% 6% 8% 10% 12%
Annualised standard deviation
25 year Compound annual growth rate
LIV FWI Gold FTSE 100 Halifax Index
Risk
Return
7. The last decade
First Growths rose 4.5x between 2005-11. Only to fall 41% between 2011-14
7
500
400
300
200
100
0
500
400
300
200
100
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Liv-ex Fine Wine 1000 Liv-ex Fine Wine 50
1. UK pension reform
2. 2005 release
3. Wine fund boom
4. HK removes duty
5. Lehman collapses
6. China Y4tr stimulus
7. 2009 released
8. 2010 released
9. PRC “gift giving” ban
10.1st rise in 16 mths
1 2 3 4
5
6
7
8
9
10
8. 8
Wine Prices below trend
Liv-ex Investables Index – 2 & 5 year Returns
9. 9
Bordeaux at lowest % of Liv-ex trade in a decade
100%
95%
90%
85%
80%
75%
60%
50%
40%
30%
20%
10%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
First Growths (% of Liv-ex Trade) Bordeaux (% of Liv-ex Trade) - RHS
First Growth Trade as % of Liv-ex Total
Bordeaux Trade as % of Liv-ex Total
10. Manhattan Property
10
Fine Wine versus other assets
Source: Bloomberg
Liv-ex 100
S&P
500
US Bond Yield
11. 11
HK Fine Wine Imports recovering?
200
150
100
50
0
-50
450
400
350
300
250
200
+8% YTD
2007 2008 2009 2010 2011 2012 2013 2014 YTD
HK Wine Imports from UK (Chg %) - RHS LX50 Index (Year End Close)
HK Wine imports from UK % change
LX50 Index year end close
12. 12
En Primeur - A Buyers’ market beckons?
Ex Chateau Price as % of Market Price at delivery
100
80
60
40
20
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Chateau Profit Supply Chain Profit (ie negoce, trade and consumer)
20 year average = 57%
• In recent vintages
lion’s share of profits
have gone to the
Chateaux.
• After 3 failed
campaigns balance
sheets in Bordeaux
are stretched
• Young Bordeaux is a
buyers’ market
13. 13
A bear market for Bordeaux rather than fine wine
Liv-ex Fine Wine 1000 sub-indices – since market peak
14. Domaine Romanee Conti (DRC) – Looking exposed?
DRC relative to First Growths and Trade Share on Liv-ex %
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
14
200
190
180
170
160
150
140
130
120
110
100
2010 2011 2012 2013 2014
DRC Share of Liv-ex Trade % - RHS DRC Index rel to LX 50 Index
• DRC has
outperformed
First Growths by
nearly 100%
since 2010.
• But trade in DRC
on Liv-ex is down
60% in 2014
DRC share of Liv-ex Trade %
DRC Index relative to Liv-ex 50 Index
15. 15
First Growths at depressed levels
First Growth Prices: Last 10 years
900
800
700
600
500
400
300
200
100
0
Post Lehman Lows
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Haut Brion Lafite Rothschild Latour Margaux Mouton Rothschild
16. 16
First Growths – Price v Score
6,000
5,500
5,000
4,500
4,000
3,500
Average Price vs Average Score
Latour
Lafite
Average
Expensive
Mouton Margaux
Cheap
Haut Brion
95.00 95.20 95.40 95.60 95.80 96.00 96.20 96.40 96.60
* Last 5 Vintages
*
17. 20
15
10
17
Parker’s Magical 20
“Wines of First Growth Quality” which are “undervalued and very smart
acquisitions”.
5
0
250
200
150
100
50
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
M20 Share of Liv-ex Trade % Magical 20 Index - LHS
Angelus
Clos Fourtet
Conseillante
Cos d'Estournel
Fleur Petrus
Haut Bailly
Leoville Las Cases
Leoville Poyferre
Lynch Bages
Palmer
Pichon Baron
Pichon Lalande
Pontet Canet
Smith Haut Lafitte
Malescot St Exupery
Pape Clement
Rauzan Segla
Trotanoy
Gay
Brane Cantenac
Magical 20 Index versus Trade Share on Liv-ex %
18. 18
To Conclude
• The ancient speculative cycle is set to continue
• Speculation plays a vital role in the fine wine market:
– Facilitates price discovery
– Generates liquidity
– Helps growers finance their crop
– Motivates growers to make age worthy wines
• The Bordeaux market is at its lowest ebb since the 70s, as then now
might be a good time to enter the market.
• Value is likely to be the main driver of prices in the early stages of
recovery.
Editor's Notes
Photograph of an Ancient Roman relief detailing the wine trade business, showing the transportation and selling of the wine. At the top a Roman customer is being served and sold some Roman, or perhaps Greek!, wine. Below an ox is pulling a cart loaded with a barrel of Roman wine. Trier, Landesmuseum. Credits: Barbara McManus, 1988. Source: www.vroma.org
The document shown here is an agreement from 1322 between Walter Giffard, the Master of the cog Our Lady of Lyme, and Sir Hugh de Berham, constable of a castle at Bordeaux, for a cargo of 93 tuns of wine (more than 100,000 litres). In 1950 it was onky 50% of that