By Peter Lunzer, guest contributor 

Investment is about finding things to do with disposable income which generate a return on that cash.

Nobody wants to lose money but it is accepted that a degree of risk is always present when putting cash to work in a variety of concepts from property to bonds, equities and a group of commodities widely referred to as alternatives.

Alternatives, including cars, stamps, coins, silver, gold, and, of course, wine, are often perceived as the domain of the ultra-wealthy since committing cash to frivolous activities beyond the reach of many. However, these frivolous toys are not only fun, lifestyle options, but they can generate strong capital returns which historically have been weakly correlated to mainstream investments. One of my favourite indicators in the past 10 years, favouring wine as an Asset Class was when UK Equities plummeted in 2008 and wines continued to show strong returns and a liquidity which stock brokers could only dream of.

The question is, what was Asia doing at that time and when and how, did wine come to the forefront of interest in Hong Kong especially ? Wealthy people in Asia had for decades mirrored the wealthy of Europe by buying collections of very fine wine. The motive was simply that the wines tasted great and was very useful in terms of honouring guests by serving a truly fine wine at a gathering, social or corporate.

The problem was that until 2007 the import tax on wine in Hong Kong was 80% of its value. In 2007, Wine import tax in Hong Kong was reduced to 40% of value and in 2008 the tax fell to an eye catching 0% – the flood gates had been undone but it still took some time for the flow of wine to show the signs of what we see today, which is Hong Kong as a major, global hub for fine wine.

When markets open up in whatever sphere and wherever, then the less than honest
elements of society see opportunities to liberate people of their cash. It is an
understatement to say that this has happened with wine and wine Investment both
in Europe and in Asia. Compelling sales people are not easy to resist but when
dealing with an unregulated industry, the due diligence is more important than ever.

The Wine frauds are well documented with the most repetitive being that the
organisation simply forgot to buy the wines for which the cash was intended.
Quietly and in the background there are some wine funds who meticulously have
devoted their efforts to creating genuine returns for their clients, but hindsight tells
us that even the honest advisers have been thwarted by a less than buoyant market.
What exactly has gone wrong with wine pricing I believe can be explained as a result
of a number of factors which in isolation might have had no effect but in conjunction with each other have created a virtually unprecedented time period, nearly 4 years,
of softening wine prices.

The first element was Bordeaux’s pricing of the 2009 harvest. There is no question
that 2009 wines are exceptional in quality but Bordeaux looked at their treasure
from the stand point of seeing how much profit people had made on previous
harvests. Bordeaux owners collectively made the bold decision to sell their wines at
the price that they would eventually reach as a result of over demand for a finite
supply. In other words the Chateaux wanted the profit for themselves and in
context, the release prices of 2009s were almost double those of the 2005s. We did
not buy any 2009s, not because of the prices but from an argument which I put
forward in the early 2000s where I explained that if you pay a premium for a young
harvest, how do you know that the next harvest will not be comparable and
therefore reduce the value of the one you bought?

We never buy ‘En-Primeur’ as it is called, for the simple reason above. 2010 in fact
was a glorious harvest in Bordeaux and we are being spoiled by the quality that was
produced. Today we are in a position today to look at the 2009s again and buy the
best at 40% discount to their opening prices.

The second element was that, armed with one of the greatest vintages of all time,
Wine Merchants had a relatively easy task selling whatever they could get their
hands on, to a market which needed little persuading. This included people who had
never bought Bordeaux in this way before. Media hype for the 2009 vintage
stretched into metres of Newspaper columns, praising the wines and stirring the
experienced, as well as new buyers, into a money no object, ‘must have’ frenzy of
buying.

The third element was a coincidence of two things. Consecutive to 2009, the ultrahigh
quality 2010 Bordeaux wines came onto the market just as China was becoming
more cautious about the ‘giving of gifts’. I remember UK wine merchant chums
lamenting how little an allocation of 2010s they had been given by their long term
Bordeaux suppliers. The stock was needed for ‘new markets’ was the excuse and a
great deal of dissatisfaction existed between UK merchants and their ‘friends’ in
Bordeaux. Then the unthinkable happened. China became very concerned about
pricing and their ability to convince local markets to buy the 2010s and so they took
the unprecedented step of Cancelling Orders to Bordeaux.

Suddenly an oversupply meant that it was a buyer’s market and the prices shrank.
UK merchants who were denied stock initially and had finished their En Primeur
sales campaign, refused to take up further allocations and so the prices shrank again.
The slippery slope swiftly affected the 2009s because the owners of those wines
discovered, as traditional buyers would have known, that there is no demand for a
wine when it is in no-mans-land between when it is first sold En Primeur and when it
becomes in demand as a seductively mature drink. Where all fine wine owners have been unfortunate and it is a strong sign that wine
was being bought for the wrong reason, is that the tumbling price of 2009 and 2010
Bordeaux began to reduce interest in more mature vintages whose prices also began
to fall, not by as much as their young siblings but nevertheless prices were going
down and not up.

Fast forward to today and the benchmark market indicator, the Liv-ex 100, listed on
Bloomberg, has risen very slightly every month since September 2014. If you delve
into what is really going on we can see that many of the 2000 vintage wines we
recommended when we felt that the market had ‘hit the bottom’ are now up an
average of 9% over the same time span. Ducru Beaucaillou 2000 is a fine example
with the average merchant price up 11% in less than 6 months. Why is this
happening if people believe that the market is ‘flat’ ? It is because there is a genuine
shortage of cases of this wine in the market which is not unusual since it is
approaching 15 years old and people are drinking it.

Everyone knows that today there is a veritable lake of fine wine in China and people
are perhaps being cautious about how they share it with their friends. Anticorruption
measures in China have not abated as quickly as some felt would happen
and wine as a symbol of gift giving, has been adversely affected. In the meantime the
rest of the World is consuming these wines at prices which are not influenced by
China and the wines are running lower in stock. The best and most sought after will
rise in price again for the same, original, supply versus demand reason.

The wine in China is often not trusted as being genuine. Fake bottles were rarely a
problem in the past although Domaine de la Romanee Conti has been subject to
more fraud than most because of its high unit price. Today it is known than fake
wines proliferate in China and in some parts of Eastern Europe. We have a simple
policy which is to buy European stock already in the UK bonded warehouse system
which has only made one journey from the vineyard. We believe that all investors
should not move their wines from European storage unless they are going to drink
them. Our policy also extends to private investors being responsible for their own
stock and so an account at the UK warehouse is opened in their name to which they
are the sole signatories.

Wine Investment is alive and well in Europe and if people in Asia are willing to have
verified, genuine stocks of fine wine, sitting under their control in Europe, then I
believe that after all fees (management, storage, insurance) we are quickly returning
to a time when the right wines will once again rise by 10% to 15% per year. Not a
bad return on investment.

As our marketing team regularly share with others, “You do not need to be an expert
to make money from wine. Just work with one”. We are here to help!

Peter Lunzer

www.luxify.com