Is The Fine Wine Market Going Sideways?
March 2023 portfolio review
Hello wine lovers,
Have you noticed that the market seems unsettled? Aimless, up, down, then up and down again. Since mid-2022, the fine wine market halted its unstoppable upward 2-year trend and started going … sideways.
What is a sideways market? And how does a sideways market impact the price of fine wine? More importantly, how to take advantage of such market conditions?
I’ll share some insights I’ve learnt through my finance years and how I apply them to the Saturnalia Model Portfolio, built using the Saturnalia wine investment platform. You can read the background of this project here:
The Saturnalia Model Portfolio (ex-cash) retracted by -0.8% in March 2023. The Liv-ex 100 recorded positive gains of 0.2% during the same period. In relative terms, the portfolio underperformed the index by 1.0%.
What happened in the fine wine market?
While the Liv-ex 100 recorded a positive movement in both February and March, the year started on a weak note. After 26 months of unstoppable monthly gains between May 2020 and June 2021, the fine wine market (here, Liv-ex 100) seems to be indecisive.
Sometimes, it goes up — following interesting releases, such as Bolgheri 2020 in February. Sometimes it goes down — such as in the second half of 2022, normally the busiest half of the year.
In financial terms, there is a name for such inconclusive movements — it’s called a sideways market.
A sideways market, sometimes called sideways drift, refers to when asset prices fluctuate within a (tight) range for an extended period of time without trending one way or the other.
In fact, this indecisiveness is the overarching theme impacting the Saturnalia portfolio.
Taking a look for example at Figeac, in the time series below created by Saturnalia with Liv-ex data — the market seems to have behaved in a schizophrenic manner, especially in the last year or so. Figeac 2019’s price lost nearly 20% in January; last month we reported that the price advanced by 26%, while in March the strong gains reverted, partially, by -8.3%.
While, of course, Figeac’s reclassification is partially to blame for the increased buy-and-sell activity of the most recent vintages, these large swings in price can be observed in other wines also.
Lynch Bages below:
Generally speaking, all names in the portfolio took a beating in March, with one notable exception: Canon.
Canon 2014, +5.3%
Canon 2016, +0.5%
Canon 2019, +1.7%
Earlier in the month, the results of Bordeaux 2020 In The Bottle came out and Château Canon 2020 was awarded 100 points by both Antonio Galloni and Jane Anson. Previously, Galloni scored the wine, during the En Primeur tasting season, 95-97 points but upgraded it in bottle. This large improvement could be the reason for the positive momentum across all of the château’s vintages.
Overall, as presented by Liv-ex in their March report, the châteaux awarded the top scores in the Bordeaux 2020 In The Bottle experienced an uplift, with Pomerol’s legends experiencing the largest price improvements.
Château Ausone, on the other hand, didn’t benefit from these high praises. Across the vintages held in the portfolio, Ausone 2016 was down -1.9% and Ausone 2019 remain unchanged.
Among the Grand Crus superstars, Ausone is systematically undervalued, as can be observed in Saturnalia’s “Fair Prices” as compared to the “Last Price”.
(For a more detailed explanation of how to read the Fair Price, you can read: Fair Price: the most convenient Bordeaux wines at a glance.)
How to behave in a sideways market …
Going back to sideways markets, three characteristics distinguish these transition periods:
Indecision among market participants: investors often struggle to identify trends or make predictions about future price movements. This can be due to a lack of significant news or events, or conflicting signals from economic indicators.
Low trading volumes: trading volumes may be lower than in a more active market, as traders and investors may be less likely to make significant trades. This can be due to the lack of clear trends or signals in the market, as well as the uncertainty and indecision among market participants.
Limited price movement: the price of the asset moves within a relatively narrow range. The price may fluctuate slightly up or down, but overall, there is little or no significant price movement in any particular direction.
In recent months, as shown above, the fine wine market has certainly experienced increased volatility (1), with periods of both upward and downward price movements.
Trading volumes (2) are notoriously difficult to track but the last year has been marked by uncertainty in China over Covid restrictions as well as a high-interest rate regimen which led many investors to shift their attention to safer asset classes (such as government bonds) as their returns started to become more attractive.
Lastly, in terms of price (3), we can do some so-called technical analysis on the price of the top-traded fine wines in the world, using Liv-ex 100 as a proxy.
The narrow price range mentioned above is called the consolidation range and can be established using technical analysis tools such as the support (bottom) and the resistance (top) levels, which are price levels that the asset has difficulty breaking through in either direction. While this kind of analysis best works with more frequent trading data, we can clearly observe the 3% range that the fine wine index has been trading in the last 9 months.
A breakout in a sideways market occurs when the price of the asset breaks out of the narrow range it has been trading within and moves significantly in one direction or the other.
A breakout can be either bullish (if increases past its resistance level) or bearish (if prices fall below the support), indicating a potential trend reversal or continuation.
If Liv-ex 100 moves beyond the upper or lower boundary of the consolidation range, we can expect that prices will soon move with some emphasis and momentum in that direction. In addition, a breakout is often accompanied by a significant increase in trading volumes. This indicates that market participants are taking action in response to the new market conditions.
However, perhaps most importantly, significant news or events such as releases, political developments, or company announcements can trigger breakouts in a sideways market. Therefore, it is important to stay informed of any relevant news or events that could affect the market.
Q2 is invariably one of the busiest times for the fine wine market, specifically during the Bordeaux En Primeur 2022. Bordeaux En Primeur is always a cause for increased appetite for fine wine buying — and therefore it will be an interesting event to monitor along with price and volume movements.
However, on the balance of probabilities, other macroeconomic factors indicate that a sideways or, worst case, weak fine wine market is to be expected. One such consideration is high-interest rates. Since the middle of 2008 global interest rates have been hovering around zero, and in some instances even turned negative. This has meant that for commodities in general, and fine wine specifically, the cost of owning commodities has been extremely cheap.
From a consumer’s point of view, the new higher interest rate regime is likely to mean that over the coming years, there will be push-back from négociants who aren’t in a position to take every allocation that they are offered. By extension, this will lead to more conservative price-rises from the châteaux, as well as increased availability of well-priced parcels of mature stock from négociants.
This is a positive outlook for wine collectors looking to find new bargains: new releases will have to give buyers more potential upside than has been the case over the past decade where the châteaux have fully priced wines, taking all of the price-growth potential.
I must admit that this edition was a little technical, but I hope you found it rife with useful information to navigate this odd transition period in the fine wine market. This newsletter is free for all readers and the best way to keep it free is to subscribe, re-share it with your wine-lover friends, and follow me on Instagram.
Thanks for being here!
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My investment thesis, risk appetite, and time frames are strictly my own and are significantly different from that of my readership. As such, the investments covered in this publication and in this article are not to be considered investment advice nor do they represent an offer to buy or sell securities or services, and should be regarded as information only.