The flow of Chinese buyers has slowed to a trickle and the post-crisis lull persists — but after a three-year downturn the Bordeaux wine market may be about to bounce back, says Christopher Silvester
Alan Rayne has had a long, distinguished career in the wine investment business — in fact, the longest, for the simple reason that he invented it. A former partner in an accountancy firm, he acquired Magnum Fine Wines in 1985, later reversing it into an ailing plc.
Wine merchants who had been around for a couple of hundred years were selling investment-grade wines, but none of them was actually putting together investment portfolios and advising clients what to do.
Rayne has been doing just this ever since. Until 2011 he had witnessed the Bordeaux fine wine market consistently outperform other asset classes, apart from during the Asian financial crisis of 1998 and the six-month downturn that followed the collapse of Lehman Brothers in the autumn of 2008.
Last year saw the Bordeaux fine wine market fall for the third year in succession, but Rayne has always warned his investors that they must look to the long term (ie more than five years), and he now believes the slide in Bordeaux prices is coming to an end.
‘The market has bottomed out,’ he says. ‘It’s had a difficult time in the last six months, but my opinion is more optimistic for this year, certainly.’ He attributes the downturn to the fact that the closed-end wine funds, which have only existed for the past decade or so, have been gradually liquidating stock over the past three or four years.
Rayne, who was one of the first to appreciate the importance of the Asian market for wine investment, also thinks the change of government in China hasn’t helped. Are Chinese officials frightened because they no longer know who they can bribe and who they can’t? ‘No comment,’ he says.
Another factor is that buyers are more price-conscious. ‘If your book price is high you’re not selling, but at the right price you can sell anything. The market’s become price-sensitive, whereas eighteen months ago it wasn’t.’
Nonetheless, the downturn has not persuaded Rayne to alter his approach to portfolio construction. ‘At these lower prices, I think 60:40 is always the best balance: 60 per cent first growths, 40 per cent the rest. The Médoc wines are still the best. Some of the others are improving, though not dramatically.
The mainstay is the Pauillac appellation, although St Julien is very, very good. Then there are the three Leovilles [Barton, Poyferre, Les Cases], Pontet Canet, the two Pichons [Lalande and Longueville], Lynch Bages, that sort of thing.’
Also, Rayne remains resolutely fixated on Bordeaux wines, unlike other wine-investment companies that are prepared to dabble in the markets for Burgundy or Italian reds. He is so well regarded in Bordeaux, in fact, that he was made a commander of the Grand Mâitre Ordre de Bontemps de Bordeaux in 2004, on the recommendation of two of the most famous châteaux, Lafite and Margaux — an accolade more often bestowed on sommeliers and hotel owners.
With regard to Burgundy, Rayne believes the volumes are too limited, the prices too prohibitive and the market too small. ‘Offering someone six bottles of something is a waste of time for all concerned. Also, the second-hand market for Burgundy has always been depressed. Always, even in the good times — unless they’re ten years old, then they get a premium, but if it’s less than ten years they don’t sell.’
Rayne acknowledges that the best Italian reds, which are known as the super-Tuscans, are excellent wines, but he is still wary of recommending them as an investment. ‘The 1997 was the trademark vintage; everything changed from then. The problem is the market is quite small but their prices are very high. There’s no major shortage of middle-aged, top-end Tuscan wines.’
Another perspective on current wine investment prospects is offered by South African Gary Boom. He left his career as a City trader (for InterCapital) in 1997 to found Bordeaux Index, a company which now has offices overseas and an annual turnover in excess of £150 million.
‘It’s the first time since the early Seventies that the Bordeaux market’s fallen three years in a row,’ he says. ‘But if you split the Bordeaux market up, what really happened last year was that the first growths were off 5 per cent and the Right Bank was up 8 per cent. So if you’d invested in Pétrus, Cheval Blanc, Angélus or Pavie, you’d have had a decent return. The Burgundy market was up 15 per cent, champagne was up 18 per cent. If you’d been slightly diversified you would have had a reasonable year.’
Boom does not recommend buying any Left Bank wines during the first six months of 2014, but he thinks Right Bank wines will continue to appreciate because of the combination of low production, reasonable current prices and demand.
He also thinks the Burgundy market is looking ‘slightly overblown’ because ‘it’s being driven by people buying because the Far East is buying, and that’s what caused the problem with the Bordeaux first growths [in 2011]. When the Chinese stopped buying — literally stopped buying — it was as if somebody flicked a switch.’
Instead, he recommends buying champagne, ‘because it’s got another two or three years of good, solid growth behind it. Krug is pretty bulletproof, in just about any vintage, and Dom Perignon is right up there. They make maybe half a million cases of Dom Perignon, but if you were to go into the market and try and pick up the ’96, it’s two and a half grand a case, and you can’t find it. And the beautiful thing is it gets drunk very, very quickly, it then appreciates, and every year they put the price of the new release up, so it’s a bit like guaranteeing you a 5 per cent minimum return a year, plus natural appreciation.
So the champagne market we are very, very bullish on for the next few years. You could possibly try and find a Dupuy rosé ’02, certainly the Krug ’03, and lap up all the Krug 2000 and ’98 that you can find. That, I think, will give you double-digit returns over the next year.’
Boom believes that the Left Bank of Bordeaux will come back into its own in the back end of the year, mainly Mouton and Margaux, which have dropped in price sufficiently. But his outside tip — and this is where he parts company significantly from Alan Rayne — is that he thinks you will get a 20 per cent return this year if you buy great Italian Barolo:
‘It has all the ingredients for really jumping in price this year, inasmuch as the back vintages are currently cheap. Secondly, you’ve got the greatest vintage in possibly twenty years just being released right now in the 2010. And if anything makes a market jump, it’s people coming in and buying up the new vintage.
‘There will be big demand for these wines and the volumes are so small. Take Voerzio: he makes only 300 cases of the top cuvée a year, yet these wines are £100 a bottle with 98/99 points. He’s got a total production of 300 cases of each of his top three cuvées, that’s 900 cases — he sold us 120 of them and we sold out within an hour. Gone. We know there’s massive demand: people are buying it and drinking it. When they’re doing that, as opposed to leaving it in a warehouse, prices go up. In three years’ time there won’t be any left in the market.’
People in the trade have now got used to China buying a quarter of what it had been buying previously. Boom believes the biggest growth market is the UK, because ‘people feel a bit wealthier and they want to spend again, and every guy in London thinks he’s made a fortune on his house. The UK, for us, is the growth market.’