Chris Smith has prepared a new research note providing a fascinating insight into the prospects for the Fine Wine market.
For many years we and others have highlighted the potential for fine wine investments to generate ‘double digit’ returns (i.e. in excess of 10% per annum). Although the long-run data still supports this, the last few years have been disappointing.
Investors entering the market in the last 3 years have seen low or negative returns and they and market commentators are understandably keen to know what the future might hold. This paper, therefore, explores what has guided fine wine prices in recent times and, in the light of this, explores whether the long-term prospects might have changed.
The top wines of Bordeaux have been traded for hundreds of years but the market changed little until the 1960s. Since then, it has been shaped by four main forces:
• Internationalisation has seen a number of countries generate new wine consumers to add to global demand;
• Investment has taken on a key role, including overturning (in the shorter term at least) the rule that supply can only fall as a wine is drunk and redefining the relative prices between different types of wines (e.g. young/mature);
• Information has allowed signals about price and quality to be transmitted rapidly around the world, leading to more efficient markets; and
• The external economic environment which over time has acted both positively and negatively on prices.
In the market today, internationalisation is a neutral force in the short term, but positive in the medium and longer term. Investment may be negative in the short-term; in the longer term it appears neutral for overall price movements, but likely to lead to higher correlation with other assets and prices which range further away from the levels which underlying demand would dictate. Information flows have little direct effect on prices but can also act to support the ‘commoditisation’ of wine. Finally economic effects look positive, especially in the medium/longer term.
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