The festive season is nearing and it is a time of year when - at least for some people - thoughts turn to enjoying a glass of alcohol. However, the market for fine wine is now far more than just about a particular fun time of the year - it is an investment area. We survey the data and report views of players in the field.

There are bitcoins, and there are fine wines. As this publication has paid witness, asset classes come in many hues, and a headline report this week found the fine wines market in rude health. The secondary market for fine wines posted its most successful year on record for 2021, breaking new ground in both the value of wines traded and the varieties active in the market, according to the annual assessment from UK-based wine market indexer Liv-Ex.

With inflation on the march, outstripping forecasts in the UK and the US, it is no surprise that investors are turning to alternatives to find yields and hedge against inflation.

Liv-Ex's Fine Wine-100 Index showed 18 consecutive months of growth in the fine wines market. The benchmark tracks the price performance of the 100 most-traded wines in the secondary market. The group says that collectors have been returning to classic labels and regions at the same time as the market continues to broaden and diversify. In October, the index surpassed a prior peak set in 2010 to 2011, when Chinese investors stoked a bull run, before China introduced new anti-corruption measures in 2011 that curbed demand.

The strong performance of the asset class this year, as with previous years, is largely down to pricing and demand at the rare end of the market, where the taste for blue chip Bordeaux and Burgundy has spurred the index to once again “hit its stride,” the report said.

Champagne strikes high note
Champagne also had a bumper 2021. The Liv-Ex Champagne-50 index rose 33.7 per cent for the year. Champagne was also the best-performing category on the Liv-Ex 1000, which tracks 1,000 wines across the globe and is the broadest measure of market activity. Among labels notching up more than 50 per cent gains were Taittinger’s 2006 and 2008 Comtes de Champagne, Louis Roederer's Cristal Rosé 2008, Krug 2000, and Salon 2002.

Rosé champagne is gaining in relevance, taking 18 per cent of champagne trading activity, with Roederer's Cristal 2012 and 2013 among the top-traded rosés for the year.

The year has also seen significant regional shifts. The US overtook the UK as the biggest buyer of Champagne on the secondary market. Champagne sales to the US shot up 219 per cent in 2021, partly down to favourable tariff changes with Europe.

Translating some of this into actual purchasing power, the report reveals that the highly-prized Salon 2002 topped this year's price-performance list, fetching £10,618 ($14,025) a case. 

If the report struck a sour note it was in the continuing regional performance decline of Bordeaux in southwest France.

A review of the secondary market saw its share of total trade (calculated as a percentage of total value traded) drop to 38.8 per cent fo the year, down from 42 per cent in 2020, and a new low for the region.

“Forty per cent felt an appropriate level for what remains an extremely important component of the secondary market," the report said explaining Bordeaux's market significance. “However, on its current trajectory, it is possible that this share could decline further as buyers focus on a smaller handful of leading châteaux."

It was one decline in a secondary market that grew overall by 7.6 per cent from 2020 levels, with trading volumes almost seven times what they were a decade ago, swayed by the growth of more regional entrants and wider interest in the asset class.

In many respects the market mirrors the changing wealth picture as ultra-high net worth individuals are being minted across new geographies, drawing in new wealth tastes.

“Wines from various winemaking regions, large and small, now trade on the secondary market – from Spain’s Balearic Islands to Aconcagua in Chile, and from the Palatinate in Germany to Calabria and Campania in Italy,” the report said.

The small markets may only generate a fraction of what Bordeaux and Burgundy are trading but "demonstrate the potential for faster growth," it said.

The UK being one example of where the number of wines and spirits traded on Liv-Ex more than doubled last year.

The benchmarks are calculated from real-time transactions from around 550 global wine traders, using the mid-point between the highest live bid and lowest live offer on the market. Prices are validated against additional data, including transaction prices, and viewed as the most robust measure for pricing available wines in the market. This chart shows returns over five years.

Booming Burgundy
Among established markets, Burgundy saw the biggest increase in wines trading for the year-to-date. The region in eastern France famous for pinot noir, Chablis and Beaujolais took just over 20 per cent of global trade in 2021. The Rhône and the US also had banner years, taking 4.5 per cent and 7.6 per cent of secondary trades respectively. Italy, as another strong producer, remained steady at 15.3 per cent, up slightly from the 15.1 per cent record it set last year.

For label connoisseurs, the Burgundy vintage Domaine de la Romanée-Conti fetched record prices this year, and Armand Rousseau and Domaine Leflaive grand crus were singled out as the year’s best-performing labels.

So where does all this sit with investors? It’s a hard one to gauge. Fine wines, much like fine art and luxury cars elicit emotional responses often led by individual buyer tastes, a degree of collecting showmanship, eclecticism, regional biases and the sheer pleasure of owning a rare vintage. These characteristics are what make collectables more interesting longer-term holds for wealthy investors.

Even accounting for these sensibilities, the Liv-Ex hard numbers show that so far this year fine wines have outperformed several equity markets, including the FTSE 100, Dow Jones and the performance of gold.

The investment case
Fine wines generally offer low correlation, steady returns, and low volatility, especially amid the current market gyrations. Investment-grade wines, as the report suggests, should not be sniffed at as a smart way to diversify and deliver decent returns. According to Knight Frank’s luxury investment index, fine wines returned 13 per cent last year and consistently return 10 to 15  per cent annually.

"Among a wide range of alternative assets, fine wine stands out as an ideal long-term inflation hedge for good reason," Coutts said in a briefing note this week about managing the new inflationary environment.

“Fine wine sits in the top 1 per cent of all wine produced, is a $4 billion niche in a global $400 billion market and is therefore naturally scarce," Coutts said.

“What makes fine wine different from other types of asset-backed investments, like classic cars or art, is that it is destined to be consumed," said Daniel Walker, head of investment at UK-based wine collector and investment house, OenoGroup.

“Every time a rare bottle is consumed, the value of the remaining bottles gets a welcome boost. And on the flip side, demand is constantly on the rise especially in newer markets like Asia, Africa and Latin America, where a growing wealthy class are developing a taste for fine wine,” he said.

What’s driving current prices
Liv-Ex data suggests that increased demand is coming from a number of fronts. First, pent up savings from tough 2020 lockdowns and persistent low interest rates have continued to drive investment in alternative assets more generally. Fine wine investing was also boosted when US tariffs on European imports were lifted in June bringing US buyers back in to restock their Bordeaux and Burgundy collections.

The market has also seen new wines from non-mainstream countries and regions, such as Lebanon, Austria, and Armenia, traded for the first time, and larger trading volumes coming from established markets in France, Italy and California.

“The current ascent, while impressive, has been much steadier, more deliberate this year,” the report suggested. “Importantly, the market is bigger and broader, no longer tied to the fortunes of a small set of wines.”

Supply and demand has inevitably also played a part, especially interest in small Burgundy vintages. “The harder they become to obtain, the more expensive many of these wines become,” the report said.  

Desirable Bordeaux estates have long been the backbone of the secondary market. First growths in the form of the region's coveted premier crus, accounted for just over a third of the Bordeaux market in 2021, and the category's best showing since 2018. Château Lafite Rothschild was in high demand and the most traded wine on the secondary market in 2021 as this table shows.

The report said that with steady returns, low volatility, a mixture of smaller yields and reduced stock availability from key regions, and notwithstanding the joy of consumption, “fine wine has proved a winning investment."

“Diversity is now the market’s real underlying strength," it concluded, "and, as buyers continue to understand that there are more wines to be discovered, that solid foundation should prove invaluable."