Wine production has been an important part of Western culture for more than 8000 years. And historically, it had significantly impacted both social and economic status of several nations. However, during the last few years, the wine industry has appeared disintegrated from the global economy. Although the trend has shifted a bit from 2016 onwards and is expected to sustain for the next 5-10 years, wine markets, most of the times, have operated separately from the mainstream economy.
The Fine Wine Trade Exchanges
There are a few exchanges that currently dominate the fine wine trading market. Each of them has its own benefits and limitations for investors.
The tendency for appearing the new trading platforms allows fine wine collectors to deal directly, not via third parties. One of the newest exchanges CWEX platform, backed up by DotChain GmbH based in Switzerland, even enables cryptocurrency holders to trade in a global market with real-world assets. The advanced trading channels offered by this platform for cryptocurrency owners open a new market for fine wine producers.
According to the Liv-Ex data, there is a noteworthy increase in fine wine trading in the secondary market. The data shows that more than 4,500 different wines from 769 brands were traded over the past year. This figure is considerably higher, compared to the 4,000 different wines from 670 brands traded the year before. The same data shows that there has been a 90% increase in the number of brands trading on their exchange since 2015. Since an increasing number of merchants are trading increasing quantities of wines, the trend is expected to grow during 2018.
It would not be wrong to say that the wine market has seen an exponential growth over the last few years. However, there are still a number of hindrances such as human mindset, heavy taxation and legal regulations that are affecting the expansion and advancement of this industry. Nevertheless, fine wine investing can still be a great choice for those investors who are looking for novel ways to diversify their portfolios.
There are numerous events in the past that have negatively impacted the fine wine market, such as the 1970s energy crisis, the early 1990s recession, the 1997s Asian Financial Crisis, the 2000s dotcom-bubble, and the 2003s Iraqi invasion of Kuwait. The equity markets have also contributed equally to weaken the fine wine economy.
Influence of the Wine Industry on the Economic Landscape
Despite the globalization and expansion of the wine market since the mid 2000s, the old human beliefs and stereotypes have always interfered with the spending and investment levels in the wine industry. All these factors, in the end, come down to the banking crisis and what happened in the period 2009-2015. Initially, as stock markets fell sharply, the wine market leaped up, and then saw an acceleration along with other commodities such as gold.
But it was irrational. The decision of the Bordeaux in April 2009 was suitable, to cut release prices of high-quality wines to levels not witnessed for the past several years.
This was mainly due to an irregular, game-changing event, namely China’s rapid industrialization, and how that affected the prices of commodities. This does not mean that fine wine is a commodity. Although it is often co-related to luxury collectibles and safe-haven assets like gold bullion, they aren’t the same.
Now, coming to the point, while the wine industry has appeared to influence the economic landscape at different points in the past, discontinuities are still there and no precise opinion can be formed at this moment about its economic impact. However, it definitely gives rise to certain questions such as can current scenario of wine market be a game changer? How does the law of supply, demand, and consumption apply? Will the market continue to reprove high pricing when things get out of control and how does it effect the investment market.
Is Wine Investment Worth It?
There’s nothing quite as poignant as drinking a wine, loving its delicious notes, and then, over the coming years, realizing that wine gets more and more expensive, to the point at which you just can’t afford it anymore. However, for investors, it is actually an opportunity to try their luck. When we look at the Liv-Ex indices, they show how the value of wine has been constantly increasing during the last few years. In fact, the reports have shown that fine wine falls under the category of one of the best performing asset classes.
According to the 2008 to 2018 statistics, benchmark investment indices show portfolios of top wines making consistent profits of 12%. Despite that 10-year period that disrupted the fame of red Bordeaux, these stats compare favorably against the S&P 500, FTSE and gold. In fact, the KFFWI index has demonstrated that scarcity-led wine markets have performed even better, with a drastic 10-year growth of 192%.
What’s the sweet deal? The private collectors or serious investors can now buy and sell wines using a wine trading platform, without having to use an agent or a broker. These platforms help them remove the middleman in the trading negotiations. There are certain websites such as Wine Owners and Cavex that investors can use to sell products and make an income with a lower commission from traders. While wine merchants often charge 10% commission, the Cavex currently charges just 3%.
Since 2008, wealthy individuals have been investing their capital in the tangible assets and this trend shows no sign of becoming dormant.
Scarcity, demand, and supply are the three factors that drive collectible investment markets. Since the supply of wine is limited but the demand is globalizing, it offers quite an attractive investment opportunity to high net worth investors. Burgundy and Piedmont are the examples of low-production wine regions whose wines have this imbalance of demand and supply. In fact, the supply of wine in Bordeaux, the largest source by far, is more limited than historically, due to an increased focus on quality over quantity. Because the higher global demand has made the prices to go up, it made Bordeaux chateaux to declassify greater proportions of their top wines if financially viable, and produce better-quality second- and third-tier wines.