Although the underlying market remains robust, there have been two recent developments which represent possible clouds on the horizon. First, China is considering increasing import duties on European wines as a retaliatory measure in a trade dispute which began with the EU imposing tariffs on Chinese solar panels. There is a suspicion that China has targeted wine because the EU trade commissioner who took the decision on solar panels is also a Tuscan wine producer.
The impact of this will clearly depend on whether the duty increase is in fact introduced, for how long and at what level it is set. It is possible that in the short term it creates greater demand as consumers in China look to buy in advance of any increase in prices. Perhaps more importantly though any effect depends on whether importers can continue to use Hong Kong (which of course is import-duty-free) as a conduit to mainland China, which would render any increase effectively meaningless.
Second is the announcement that European wine fund Nobles Crus has been prevented by its Luxembourg regulator from paying redemptions or taking in subscriptions. The Wine Adviser and others have been expressing concerns about this fund for some time. The official reason for the suspension of dealings is that there have been substantial institutional redemptions following a change in EU law which will prevent unit trusts from investing in alternative assets such as fine wine. However there has already been a stream of redemptions since concerns about Nobles Crus were first aired publically last year, and it seems likely that the very high valuations placed on the fund’s stock have not helped matters. Had these valuations been realistic, stock could simply have been sold at or near valuation price in order to meet the redemptions – something which is evidently not the case.
With perhaps £70m (according to its own figures) of wine under management, if Nobles Crus is wound up there could be significant consequences for the market. However, there are several reasons why the impact should be much less than it initially appears on the wines which held by our Fund (which are all Bordeaux, only in standard formats, and only from good to great vintages in the 1990-2009 range):
- Nobles Crus invests in a much wider range of wine than does our Fund, including at least 50% Burgundy, plus large amounts of Bordeaux older than 1990, plus en primeurwines. It also holds large, non-standard formats, and possibly wines which are not in bond. Overall the Wine Adviser believes that only around 10-15% of their portfolio (i.e. around £7-11m on their own valuations) is wines which are held in our Fund.
- Liv-ex found that Nobles Crus’ valuations were overstated by around 37% compared to the Liv-ex mid price (which is also our valuation price). This suggests that on a realistic valuation the fund holds only £5-8m of wines in our Fund.
- It seems likely that if Nobles Crus is entirely wound down it will occur over a lengthy period of time rather than immediately. In the context of a market which is worth £5-6bn globally, with annual inflows and outflows of around £1 billion, the Nobles Crus figures are therefore not particularly large.
Of course there remains uncertainty about what will happen next, and (as with en primeur) it is possible that the confidence effect will be as important as the actual implications of any stock being offered on the market. It should also be noted that the above figures are only for the wines which our Fund holds: there is the potential for larger effects in other sectors of the market, which are smaller and therefore less well positioned to withstand heavier volumes on the supply side.
We hope that further details will emerge soon and we will monitor the situation closely, but the Wine Adviser has also repeated the strong advice published when this story first became public in October. First, it urges all those considering an investment in wine, whether in cases or in a fund, to have their holdings regularly valued and reported on. Valuations should be carried out independently by Liv-ex, the fine wine exchange, which is currently the only source of reliable pricing information.
Second, it suggests only investing in “liquid” wines i.e. those with regular trading and the volume of turnover to buy and sell comfortably and to provide accurate valuations. The risk profile of the investment and the possible errors in valuations can rise considerably if the portfolio contains less liquid wines, i.e. anything other than the top châteaux of Bordeaux, wines older than around 25 years, and wines not in standard formats (75 or 150cl bottles sizes in original cases and in bonded storage).
Although these developments make the immediate outlook less positive than previously, we remain optimistic based on the underlying fundamentals of wine as a physical asset in an era of developing inflation.