Wine Market Update - Banks, inflation and interest rates.
Wine, Investment, Liv-Ex, News
Fine wine prices have grown in value over recent years, retail investors have easier access to the market via online websites, brokers and advisors. In general the market has grown in demand.
Why are prices in the last 2 months holding back, even falling with liquidity levels seemingly low? Perhaps, its worth reflection on the bigger picture for now.
New entrants to the fine wine market over the last 2 years will have had great opportunities to build a collection for consuming/ investing in wine relative to the same process over the last 15 years since the sub-prime mortgage market financial turmoil that begun in 2008. Are we now in the same Quan drum, or is the economy even worse?
We have recently resurged from a worldwide issue, yes COVID. Economies were forced into lockdown and not just overnight. Restaurants, entertainment and luxury sectors were out of operation and work from home was the new regime.
Earlier this year we witnessed the collapse of Silicon Valley Bank (SVB) which dealt a huge blow to the wine market, especially for the likes of California. After SVB had built the winery clients up since 1994 lending in excess of 4bln$ to wineries, vineyards and vendors, its no wonder we have seen some pull back in the wine market generally speaking according to data from liv-ex (the leading benchmark for the fine wine industry). Recent SEC fillings show that approximately 1.2bln$ in outstanding loans to high-end users in the wine sector when the bank collapsed. However, FCB (First Citizen Banks) now stated that the SVB's wine division is thriving under it's new owners, FCB. The consensus being sung is that right now they are experiencing an above average growth with existing employees and borrowing clients.
Right now we are experiencing heightened inflation, increasing interest rates and another recession that keeps getting kicked down the road. The coupon for loans has significantly increased year on year, and now the decision is there for further borrowing to be placed, but what if the costs of borrowing are going up another year, will this be the catalysts for borrowers to take the rates available today?
Also, we must consider the FX currency rates, if GBP is rising then this means foreign buyers will not have favourable prices like before. Bordeaux is now closing out from the latest En-Primeur campaign and the bias we are leaning towards is that the market will pick back up in Q3 leading into Q4 2023. The 2022 En-Primeur campaign reflecting price increases between 20 - 30% on the previous year.
Remember in 2008, after the financial crisis we saw the Liv-Ex 100 exchange rally 74.2% up until late 2011. We are sure many are considering if these trends will reoccur and bring stimulation to the market.
At the time of writing, recession worries loom but not yet announced, all eyes on the US. Buyers are cherry picking the markets and great deals are available. If you look into twitter posts from Liv-Ex and the general market reports they publish, you can see that the secondary market for fine wine is where buyers are really being rewarded for staying bullish. Whilst prices may have fallen back a touch, nothing has traded with enough volume to create fear, but some vendors may be forced to sell for multiple reasons, or clients realising positions on portfolios as cash is needed.
We see most of the fine wine trade in London, the majority of wines are traded in GBP Sterling. Data from China recently has not been as positive as expected, it may seem all doom and gloom but under the current climate economically this makes sense. Borrowing may not have only become harder, but also more expensive. Inflation will be overcome and interest rates will pullback in time, historically speaking wine has always been used as a hedge against these elements.
On the other side of the pond in the West, when the economy reopened from COVID, unused capital was injected into purchasing goods and services. Here we saw notable sales in a wide range or wines, including Bordeaux, Burgundy, Champagne & Super Tuscans. Realtive to now is that China are yet apply the same rule of thumb to stimulate their economy, will the result be even stronger over the next 6 to12 months for the same wine regions? Our opinion at Veblen is that we do see the potential of an increase in trade coming out of Q3 2023 into Q4, patience is required.