This article is brought to you in partnership with Vinovest
Savvy investors are always one step ahead of the curve. They anticipate trends and invest accordingly. With the new year around the corner, it’s time to unpack the four biggest trends in wine investing for 2022.
There’s no way to sugarcoat it. The 2021 harvest in Champagne was brutal. Devastating frosts in April, torrential rains in May, and wildfires in August eliminated more than half the grapes before the harvest began.
You don’t need an economics degree to realize that a Champagne shortage bodes poorly for consumers. The reduced supply will put upward pressure on prices. How much will Champagne prices jump? That’s difficult to gauge.
Comité Champagne, the regional trade body, implemented a reserve stock system for these occasions. Wine producers must store some of their wine during bountiful years to meet demand during lean ones. This reserve system provides a hedge against poor vintages and allows wineries to manage their prices.
James Simpson, the managing director of Pol Roger Portfolio, anticipates some “stable, sensible” price increases for Champagne over the next year. Much like a night of bar hopping, though, the key is moderation. In an interview, Simpson said that producers should be careful not to “overdo it” with price increases.
Shaq and Kobe. Coke and Pepsi. Tuscany and Piedmont. Each of these pairs ranks among history’s most iconic tandems. However, that’s slowly changing for our dynamic duo from Italy.
Italy has seen its fine wine market broaden dramatically over the last decade. In 2010, Tuscany made up a whopping 95% of the Italian wine traded on the secondary market. Today, that figure is 58%.
Meanwhile, Piedmont has gained significant ground in that time. It has grown from a roughly 4% market share to 39%. According to Liv-ex, a fine wine marketplace, the number of Piedmont wines traded on the secondary market has risen 11,000% since 2010! (No, that is not a typo.)
Perhaps the most compelling storyline comes from what some consider underdog regions. Places like Puglia, Umbria, Abruzzo, and Campania were all but irrelevant ten years ago. Now, they account for 5% of the Italian wine market share. While their global footprint remains small, their investment potential is huge. As the fine wine market continues to expand, expect these bit players to start taking leading roles.
Which collection of 2015 wines would you rather have?
– Château Mouton Rothschild
– Château Margaux
– Carruades de Lafite
– Petit Mouton
– Pavillon Rouge du Château Margaux
Option 1, obviously. Each bottle marks the epitome of a classic Bordeaux red blend. People routinely pay $500 to $1,000 for a single bottle of these first wines. Meanwhile, Option 2 exclusively features second wines, containing grapes not deemed suitable for the grand vin.
Now, let’s try this again. Here are the exact same wines. This time I’ve included the 5-year return on investment for each bottle.
– Château Lafite Rothschild – 50.21%
– Château Mouton Rothschild – 19.05%
– Château Margaux – 93.35%
– Carruades de Lafite – 130.1%
– Petit Mouton – 79.69%
– Pavillon Rouge du Château Margaux – 39.13%
Second wines have outperformed their top-tier brethren in an upset of David versus Goliath proportions. On the surface, this outcome makes no sense. Why is the value of ‘inferior’ second wines rising faster than that of first wines?
There are two reasons. First, second wines have improved over time. Estates have more grapes to choose from than ever for their cuvées. This bounty allows them to be ultra-selective about what goes into their grand vin. As a result, higher quality grapes are ending up in second wines.
Next, second wines offer an affordable price point for investors. According to Wine-Searcher, a bottle of 2015 Château Lafite Rothschild costs $996, while 2015 Carruades de Lafite is $420. Even though there is a drop in quality, consumers can still access the prestige and cachet that comes with a name like Lafite Rothschild.
The Liv-ex Second Wine 50 index reinforces this point. Over the last five years, it has returned 56% on investment. Since 2003, it has grown 805%. Those returns make it the best performing sub-index in the Liv-ex Bordeaux 500, giving new meaning to the phrase “second best.”
Alright, I’m bending the rules. You do not have to wait until 2022 to see the impact of inflation. The consumer price index increased by 6.2% in October, the highest inflation rate since December 1990.
The price of everyday essentials like groceries, gas, and shelter is rising. That’s because commodities are highly inflation-sensitive. Their prices mirror the rate of inflation. Therefore, if you own a commodity like fine wine, it doesn’t lose its value.
On the other hand, stocks and bonds are inflation insensitive. When inflation rates surge, their prices don’t respond with a corresponding jump. Investors with stocks and bonds in their portfolios will see their assets stagnant in value as a result.
Research from Northern Trust, a financial services company, confirms these conclusions. It looked at the inflation sensitivities of various assets over the last 20 years. The researchers found that commodities like fine wine have the highest inflation beta (5.14). (Inflation beta is a refined way of measuring correlation.) What had the lowest inflation betas? Stocks (0.19), bonds (0.19), and public infrastructure (0.15.)
Inflation isn’t going away anytime soon. As consumers see their purchasing power dwindle, it’s critical to have a hedge against inflation in your portfolio. (No, gold isn’t a good hedge.) Even having a small allocation of wine in your portfolio can alleviate inflation’s sting.
The Bottom Line
The world of fine wine investing is everchanging. Just look at how Tuscany’s stranglehold on the Italian wine market has evolved into a duopoly with Piedmont over the last decade. Staying up to date with investing trends will ensure that you stay ahead of the curve and give your portfolio the best shot at the maximum return on investment.