Market Analysis - Other - 24. January 2024

Wine Investment Insights: Annual Report 2023 Unveiled

Dive into the intricate world of wine investment with our Annual Report 2023. Discover the market trends, challenges, and extraordinary opportunities that shaped the year.

Click the video above to learn the essence of the report in less than 5 minutes. Or read the full report below...

Last year, after two years of massive growth, it was tempting to look at wine investment from a short-term perspective. In the annual report from last year, we resisted the temptation and concluded that the basic premises for wine investment remain unchanged – as conservative as it may sound. Fast forward 12 months, 2023 proved to be the perfect example of wine still being a long-term investment.

Numerous economies are still grappling with the aftermath of the pandemic, the Russian invasion of Ukraine, and conflicts in Israel and Palestine. As noted in Liv-Ex's annual fine wine market review, these factors have prompted investors to shift toward classic options like gold. Gold is priced at an all-time high, buoyed by concerns over the conflicts in Ukraine, Israel, and Palestine.

Simultaneously, China's growth forecasts have been revised downward due to challenges in its crucial real estate sector, evidenced by the Evergrande group filing for bankruptcy in August. The real estate sector accounts for about 30% of China’s GDP. Moody's downgraded its outlook on the country's credit rating to ‘negative’ on December 5th, citing the economic challenges and a burgeoning personal debt crisis.

While inflation rates are receding from the peaks of 2022 and early 2023, core inflation (excluding energy and food) remains elevated globally. The International Monetary Fund (IMF) projects that most countries won't return to pre-pandemic conditions until 2025.

Adding to the challenges, the past 12 months have witnessed central banks implementing a series of interest rate hikes, impacting mortgages and other lending sectors. Interest rates are now at their highest since the 2008 financial crisis.

In essence, consumers have less disposable income compared to two years ago, significantly impacting the fine wine market. Buyers are now more cautious and unwilling to spend as much as they did the previous year.

In 2021, we reported price raises of almost 19%; in 2022, wine under administration at RareWine Invest was up more than 22% on average. At the end of the day, if something rises immensely in a short time, it will typically settle slightly lower. In 2023, we saw price corrections across the most critical wine investment categories, leading to decreases of 7.33%. Despite the correction, the performance is better than the general fine wine market, demonstrated by the Liv-ex Fine Wine 100 index showing a loss of 14,1% in 2023. 

Realised Returns in 2023

In contrast to typical wine investment providers, RareWine Invest stands out by offering comprehensive support in realizing your wine portfolio through our international sales network when the opportune moment arises. While investment platforms may often boast impressive figures, the actual test comes when the portfolio is set for realisation.

Throughout 2023, a remarkable 1,333 positions were successfully sold, yielding an impressive average return of 46.29% for our investors. These positions, held for an average duration of approximately 2.5 years, just shy of our recommended 5-year minimum, showcase an achievement of which we take immense pride. This accomplishment becomes even more noteworthy in the face of the challenging market conditions encountered in 2023.

This accomplishment underlines the importance of a plausible divestment solution when investing in wine, as our investors leverage the expertise of one of the world's premier fine wine trading companies, RareWine Trading.

Navigating The Current Market

In navigating this challenging terrain, the fine wine market mirrors other passion-driven investments, requiring a delicate balance between buyers and sellers. The ongoing price correction has yet to entice buyers back in significant numbers, suggesting that prices may face continued pressure in the short term. The prevailing impasse, characteristic of bear markets, reflects the hesitancy of buyers to commit to current market prices and sellers to accept potential losses.

Despite these challenges, the market is not devoid of opportunities—quite the opposite, actually. As bottles gather in storage facilities and high-yielding vintages loom on the horizon from Burgundy, Tuscany, California, Bordeaux, and Champagne, 2024 is poised to become a favorable market for buyers. In fact, by the close of 2023, we identified market opportunities not witnessed in quite some time. In upward-trending markets, there is room for exploration and experimentation, and buy-and-hold is the right strategy in challenged times as wine remains true to the basic premise: a solid long-term investment asset.

Contrarywise, major stock indices demonstrated positive performance in 2023, with the S&P500 registering a notable increase of 24%, a stark contrast to the 19.4% loss observed in 2022. It is worth noting that a record of 72 % of the S&P 500 components underperformed in 2023, according to Apollo Global Management, meaning that the S&P 500 was held up by the so-called “Magnificent Seven,” which is Apple, Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla.

The renewed optimism regarding reduced inflation rates and the possibility of interest rate cuts in the US rekindled investors' enthusiasm in the stock market, contributing to the upward momentum in equities. Since 2004, the S&P 500 is up by 411%. In contrast, Liv-ex Burgundy 150 is up by 655%, and Champagne 150 is up by 491% in the same period. Burgundy and Champagne account for more than 70% of the wines under management at RareWine Invest.

Burgundy – availability over price (-6,68%)

2022 marked a record for the Burgundy category, with an average price rise of more than 34 % across all positions under management. In 2023, Burgundy lost some of its momentum, and price corrections were seen, especially among those positions that rose the most the year before, exemplified by Domaine Arnoux-Lachaux, which in several positions registered tenfold price increases in 2022. More of those positions have seen corrections in 2023.   

Burgundy has established itself as the most attractive category for wine investment in the long run and has delivered an annualized return of more than 10,5 % since 2004, according to Liv-ex Burgundy 150. The scarce nature of the best Burgundy wines will always favor the investor. For Burgundy, we find the most significant correlation between production and consumption. Often, it is not a matter of price but of availability because, in the long run, Burgundy has proved to be a safe haven.

Overall, the Burgundy category suffered a decrease of 6.68 % in 2023 across the palette. However, there were also positives to be found, with 2018 Domaine Bachelet Charmes Chambertin being one of the most eye-catching, raising almost 24 %.

Champagne suffers corrections (-11,15%)

Predictably, when considering volume, the Liv-ex Power100 list reveals that Champagne overwhelmingly dominates the most-traded wines in 2023. This prevalence is attributed to the region's high liquidity and universal appeal to drinkers and collectors, resulting in substantial quantities of Champagne being traded and enjoyed continuously across the globe. Not to forget that many of the most prestigious Champagne brands are owned by wealthy luxury conglomerates that post endless amounts of money in branding and marketing, ensuring that Champagne will be even more appealing to consumers in the years to come.  

With prices skyrocketing for two consecutive years, Champagne faced price corrections in 2023, leading to a loss of momentum with a decline of 11.15 %. Isolated, this trend for Champagne might raise concerns, but bearing in mind that Champagne has witnessed a nearly 50 % increase over the last three years, there is no state of panic. Despite the current downturn, the best Champagnes still seem cheap compared to top Burgundy or Bordeaux wines, leaving plenty of room for growth in the long term.   

One of the most popular Champagnes for investors in recent years is, without doubt, Salon, which has also been synonymous with the highest returns. In the past year, also Salon suffered corrections, most notably the 2002 Salon, which saw a decrease of more than 22 %. Remember that the 2002 Salon is still up by almost 300 % since it was broadly introduced to our investors in 2018.

Italy shows resistance - again (0,04%)

At RareWine Invest, we have gradually raised our recommendation for Italian wine, primarily focusing on the best Barolos, Barbarescos, Brunellos, and Super Tuscans. Piedmont and Tuscany have raised the bar for quality in recent years, and more is expected from the coming vintages.

Not only has Italy displayed resilience in 2023, but the bid-to-offer ratio is currently healthier than in the other categories, leading to a positive result for 2023 of 0,04 %, considerably beating the marked as the Liv-ex subindex ‘Italy 150’ is down by -6% in 2023.

Consumers have become cost-conscious, shopping for cheaper alternatives to premium-priced brands as inflation erodes spending power. We have addressed this pattern before, using the term ‘affordable luxury‘. During economic downturns, consumers still treat themself to a bit of luxury, but their preferred choices are more likely to be 'affordable luxury' wines, unlike expensive ones from Bordeaux or Burgundy.

It is not the first time we have witnessed Italian wine showing resistance during economically uncertain times. According to the Liv-ex index Italy-100, the broadest way to track the performance of Italian wine, Italy-100 rose by 62,9% from November 2007 to April 2009 during the Financial Crisis. The stock market almost halved during the same period and only achieved full recovery in the Spring of 2013.

Bordeaux Standing Firm – (-0,09%)

The current downturn has come with a shift to safe havens in the market, older Bordeaux vintages being an example. This flight to quality is discernible even inside specific regions as collectors focus on established brands and the highest-quality vintages. Thereby, Bordeaux has only been hit marginally in the past year, with prices decreasing by 0.09 %.

Regarding Bordeaux, we stand firm in our stance. This category is not for every portfolio. We only recommend Bordeaux wine as a tool for diversification in more extensive portfolios or as an investment of passion. The supply of Bordeaux is not favorable compared to the demand. Also, the price starting point still seems too high to make a good investment for most Bordeaux positions. In 2023, we addressed more challenges for Bordeaux in the long run. You can read the analysis here

Also, our recommendations for Bordeaux are limited to the absolute elite, typified by 1998 Petrus, who delivered a return of 10% in 2023.

Rest of the World with mixed fortunes (-1,64%)

The Rest of the World category is an eclectic classification, encompassing items that don't neatly fit into other predefined categories. It encompasses Rhône, Napa Valley, and a limited array of German and Spanish wines, along with Australian wine, namely Penfolds.

Wines from this category under management at RareWine Invest declined 1.64 % in the past year, which may be acceptable considering the nature of the market in 2023.

Most notably, Screaming Eagle 2018 and 2019 were down by 11 %. However, these are still young vintages from this cult producer, and the scarcity of these bottles will favor the investors in the long run. Isolated, Napa Valley went down by 3.29 %.

Among the positives are Glenfarclas 50YO 2022 release, which went up by 10 % in 2023, along with The Macallan 18YO Double Cask 2022 release, which increased its valuation by 8,7 %.

RareWine Invest’s Opinion

2023 was clearly marked by a lack of purchasing power and weakened liquidity in the wine market due to the array of geopolitical and economic events. At the same time, market expectations of falling prices have created a large bid/ask spread and, therefore, lower trading activity. Ultimately leading to fewer price points, more significant fluctuations (in both directions), and uncertainty regarding pricing and valuation.

With decreased liquidity in the market, the number of buyers has significantly diminished compared to a year ago. Conversely, the number of sellers is increasing as concerns mount about having substantial amounts of money tied up in wine. This unhealthy imbalance leads to more significant fluctuations than usual.

The product itself remains unchanged, and so does its core value. History has demonstrated that wine prices rise as liquidity returns to the market and purchasing power is regained. Liquidity will slowly return to the market once interest rates are reduced and stabilized. Until then, buyers and sellers must reach a compromise.

Nonetheless, this pricing pattern echoes historical cycles. After a stellar year for wine investors in 2018, we faced a similar situation. In 2019, global market challenges arose due to the US/EU trade war, Hong Kong unrest, and Brexit turmoil, and liquidity was drained from the wine market. While it wasn't the most favorable development for investors then, those who invested before and during this period are experiencing the most returns today. Additionally, there's a threshold for how low-priced a wine can become before professionals consider it too cheap and start buying.

To presume significant price upswings in the first half of 2024 would be overly optimistic. A more plausible scenario involves a healthy market stabilization following the corrections observed in 2023. Remarkable opportunities, as previously highlighted, are anticipated to persist through much of 2024, establishing it as a favorable buyer's market.

Things might change if or when the interest rates come down, and the geopolitical situation is stabilized. However, it might take months before we see significant changes in the market upon a reduction of the interest rates.

In the realm of investments, timing holds vital importance, also in the context of wine. Every investor aspires to purchase at the market's bottom and sell at its peak. Selling in the current market conditions may not be ideal, necessitating a buy-and-hold strategy. While the current market may not be optimal for selling, it's noteworthy that wine seldom experiences prolonged downturns, typically rebounding within a year and a half, indicating proximity to the market bottom. Our steadfast recommendation endures: wine investment demands a minimum 5-year horizon or more, adhering to the foundational principles of wine investment.

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