Buy cheap wine as the dollar falls
The big story in the wine market this year, as in all markets, has been the slide in the dollar. Although working this kind of thing out is an inexact science, it is generally accepted that the US market accounts for about 30% of the global fine-wine trade.
Given this trade is dominated by French, Italian and Spanish wines, the US share of the market is almost entirely on the buy side. The dollar-based buying market grows even further if one takes account of dollar-linked Asian currencies - in particular the Hong Kong and Chinese ones. Thus the old adage ‘if Wall Street sneezes, the world catches a cold’ is as true for the wine market as for the financial markets it was coined to describe.
The chart below takes the Liv-ex 100 (our index of investable wines) in sterling terms since Jan 2002 and compares it to a dollar-based index. The comparison is stark. In dollar terms, an investment in the wines in the Liv-ex 100 three years ago shows a tidy return of 50%. In sterling, it is a mere 10%. For the dollar-denominated buyer, however, prices are now looking a little steep. The result? There has been a noticeable decline in buying out of the US this year. American buyers are all but disappearing. In fact, what we are beginning to see is a situation where, instead of being wine buyers, US merchants are turning into sellers of fine wine, something that is bound to have a short-to-medium-term dampening effecton the market.
Stock re-imported into Europe from the US tends to trade at a discount. This is not entirely logical, given that modern methods of refrigerated transportation make travel between Europe and the US no more perilous than travel within Europe, yet it is still the case. As this discounted stock hits Europe, prices generally will adjust down. This means that the Liv-ex 100 may find itself treading water in both dollars and pounds into 2005.
This situation, though, will present opportunities. If your merchant offers you stock that has returned from the US, don’t be dismissive. All offers of top labels at good prices should be considered - if you get them, you are likely to be benefiting from the dollar’s woes. In terms of stock picking, it would be wise to concentrate on the top labels, where the demand/supply equation is no longer in equilibrium. Basically, this means focusing on older vintages, where supply is being drunk while demand remains, at worse, stable. The wines in question are, as always, from Bordeaux, and the vintages are 1982, 1986, 1989 and 1990. Within these vintages, there are a handful of top labels that will always have buyers - those that carry 98-100 points from Robert Parker. If you see these offered at a good price, consider them carefully.
Justin Gibbs is director of www.Liv-ex.com.
