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The First Growths vs. the Rest: Is the Fine Wine Market on a Knife Edge?

2016 was a phenomenally volatile year with seismic shifts in the socio-political spheres; this characteristic also held true for the fine wine market. An event (Brexit) prompted a remarkable comeback in the fine wine market whereby prices grew robustly and consumer and supplier confidence improved. However, are we now witnessing a downturn in the market and are the wine price increases that we have experienced since July 2016 coming to an end?

Smaller gains, and market slowdown 

The below graph perfectly depicts the huge and sudden price increase in July 2016, though it also simultaneously paints the price spike as an anomaly. The good news is that since July 2016, the fine wine market has seen price increases occur month-on-month; however, the market has experienced smaller and smaller price increases since. Though when we focus on First Growth Bordeaux in relation to the market, we start to notice some telling information.

first growth price performance vs market graph

What we can see is the fine wine market severely slowing down in December 2016 with only the First Growths (i.e., Lafite, Mouton, Latour, Margaux, Haut-Brion and D’Yquem) and the Liv-Ex 100 Index (i.e., the Top 100 wines worldwide) achieving 2.67% and 1.35%, thus returning to above average price growth (1.26%). Whereas, the Liv-Ex 500 Index and Liv-Ex 1000 Index went from an above average price growth in December (1.03% and 1.02%) to below average price growth in January 2017 (0.68% and 0.33%), indicating a declination in price growth.

In January 2017, prices significantly improved for a very concentrated pool of wines, with First Growths being the best performing wines in terms of month-on-month price growth. January’s price increase was largely fuelled by the, albeit disappointing, Chinese New Year and would have skewed the price growth rates.

Market risk and potential downturn

Though it may come across as positive that there is still growth present in the market as a whole, and it well and truly is, however, it can be countered with the fact that January 2017’s price growth was 70% less than July’s! This leaves one to wonder whether February will see similar downward price growth – February will be telling.

In sum, the highs of July 2016 were an anomaly, regardless of how impressive, and those highs have not yet been seen again since. Although prices do not conclusively look as though they have started to decrease and regress, it does appear as though prices are increasing at a more sustainable rate and have hit a maximum price increase that the market can ‘stomach’. However, the worrying element is that the market as a whole is showing potential signs of weakness, and this is what we’re witnessing from the Liv-Ex 500 and the Liv-Ex 1000 indices.

Wines that sit outside the First Growths and the Top 100 wines are seeing price increases and price growth come down, while wines that sit inside the aforementioned categories are seeing the bulk of the growth. This factor does not fuel confidence for the long-term sustainability of the fine wine market as a whole, should this trend continue. In fact, this screams of an extremely concentrated market wherein the performance of the entire wine market is hugely dependent and over-reliant on a small pool of top wines which are considered as the crème de la crème, signalling a high level of market risk.

So, are we witnessing a downturn in the fine wine market? No, not yet, but there are early signs that flag up this possibility. Are the price increases that we’ve seen since July 2016 coming to an end? In short, yes; the tide is turning for the market as a whole and price increases seem to be coming down, though this does not hold true for the Top 100 & First Growths, which are still witnessing further growth. However, there is uncertainty about how impactful the Chinese New Year was on the market – in regards to the size of the price increases – and as a result, time will tell – we should look to February for further clarity as to whether January was also an anomaly.

So, what should we do?

Buy, hold and/or sell wine? The classic conundrum. I see this as the perfect opportunity to re-evaluate your wine portfolio and devise a strategy wherein you perform a combination of buying, holding and selling wine. Our online Wine Valuation tool will guide you on your wine portfolio’s overall value, and how much each individual wine is worth. However, if you are an investor with long-term wine investment horizons, then get in touch as we are offering clients with investment grade wine stock a monthly analysis and valuation of their portfolio, completely free of charge. This report will arm you with the performance information required, enabling you to make an informed decision on your wine portfolio. On a side note, some are – and many others should be – aware of the time factor when making decisions – the longer you wait, the greater the risk.

About the Author

Burhaan joined JF Tobias in August 2016 and is our  Data & Systems Analyst – with his professional interests being big data and information systems. Prior to his current role, Burhaan filled several positions in Investment Banks, working in analytical capacities within regulatory environments. Graduating from Economics in 2014, Burhaan holds interests in philosophy, sociology and political economy. Besides work and academia, Burhaan enjoys sport, predominantly amateur boxing, rock climbing and swimming.

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