MICHAEL FRIDJHON: Beware the Greek tragedy lurking in wine investment

For some time now fine wine has been promoted as an instrument of investment (rather than as a consumable). Prices of the best known international wines had been increasing well ahead of inflation, prompting institutions to package them (or derivatives of them) in tradable units. For the past 25 years transactions in the underlying assets have been recorded on Liv-ex — which maintains indices across all the major classes. This supplied the trends on which brokers of these financial instruments were able to engage with potential investors.

In Britain wine is considered an investible commodity that can be included in your pension investments, and this in turn fuelled the boom: since it’s deemed to be a “wasting asset”, it’s exempt from capital gains tax. This has obviously helped to drive the growth. Over time the wine funds, ever on the lookout for different properties to add to the mix, also diversified their selection criteria beyond the blue chips of Bordeaux classed growths, fine Burgundy and prestige cuvée champagne. Lesser known estates/appellations promised greater speculative potential and enabled brokers to avoid apples-for-apples comparisons.

As a result investment wine enjoyed an unprecedented bull run (abroad rather than in SA where the secondary market is very thin, and the brokerage cost — about 30% in total — too high for easy trading). No-one paid heed to the disclaimer that “past performance is not indicative of future results”. Why should they? A whole generation went in, made money, and exited painlessly and profitably. The naysayers were proved wrong for so long that many people came to believe that the laws of gravity would not apply.

There’s a tidal wave of nasty news out there and it’s building into a tsunami. For several years the great wines of Bordeaux have been the key components of the major bonded investments. Generally produced in larger and therefore more easily traded volumes, they are sold within months of the vintage as “futures” — to be disposed of years down the line when they are deemed ready for consumption.

Except that actual per capita consumption has been declining — so the pipeline of ready-to-drink stock has been clogging up. Meanwhile, the Bordeaux producers, convinced by what seemed to be an insatiable demand for their products, have been cranking up their prices. While 2022 was a very good, very showy year and it was priced accordingly, and the lemmings moved in and mopped it up, 2023 wasn’t nearly as good, though prices hardly went down. Now the 2024s have just been offered to a moribund market where back vintages (many not exceptional) are stacked up in the warehouses of distributors (and to a lesser extent, of the chateaux themselves).

It was clear by September last year, when the grapes were coming into the cellar, that 2024 wasn’t going to be yet another “vintage of the century”. The wines were good enough, considering how tricky the weather conditions had been, but there was no compelling reason to speculate on their upward potential. Producers recognised this and their release prices were, on average, about 30% down on the previous year. This was too little too late.

Many well-known properties have sold nothing at all on this year’s future campaign. That message has reached the trade, and also the investment funds, which are actually holding stock (rather than those trading in derivatives). The best they can do is to bail out now and hope to beat the bloodbath. Whatever else happens, they will be contributing to the selling frenzy.

I have always been cautious — perhaps overly so — about wine as an investible asset. I grew up in the crisis of the 1970s, when many of Bordeaux’s most famous négociants and estates collapsed. What is unfolding — mainly in Europe but with a knock-on effect in SA — has all the elements of Greek tragedy: hubris, até, catharsis. It will be many years before the world of fine wine recovers, and it won’t ever look quite the same again.