WineLeaks #14 - Finding Value in Champagne
Is the bubble about to burst?
This week, we are looking at the Champagne market with Tom Hewson at Six Atmospheres.
The Market Take
📅 Week 41
🔴 Markets in a Minute
Inflation (CPI) 12-M to September:
US +8.20% / Euro +10%
Interest Rates (10-Year Treasuries):
US +4.024% / UK +4.389% / Germany +2.353%
S&P 500 (5D):
Crude Oil WTI (5D):
CBOE Volatility Index VIX (5D):
US$ Index DXY (5D):
What happened in the markets last week?
1️⃣ Derivatives markets sent out an ominous signal to investors on Monday, pointing to a persistently volatile stock market for the coming months. Futures contracts tied to the CBOE Volatility Index, or VIX, rose above 30 across the entire term structure, according to FactSet. That's far above the long-term average of 20.
2️⃣ Federal Reserve officials expressed concern at their meeting last month over the persistence of high inflation, underscoring their intention to continue raising interest rates in large steps despite the pain that could cause.
There are two inflation indicators — one, the so-called core consumer-price index—which excludes volatile energy and food prices, rose 6.6% in September from a year earlier, the biggest increase since August 1982, a sign that strong and broad price pressures are persisting. The measure increased 6.3% in August.
The second one, the overall CPI which includes energy and food prices ticked down to +8.20% (from +8.30% in August).
A hot inflation report would normally push up long-term interest rates and pull down stocks. That's exactly what happened on Thursday morning. But by midday stocks were powering higher, which continued into the afternoon, only to tumble again Friday.
What drove the market's move higher? It's a puzzle.
Some investors say the market’s roller-coaster ride as of late seems like a classic bear-market rally: a case of beaten-down markets temporarily bouncing higher, only to resume selling off. “Stocks have often posted some of their biggest gains of the year in the midst of their worst selloffs, like after the dot-com bubble burst in 2000, in the months before Lehman Brothers collapsed in 2008 and after the start of the Covid-19 pandemic in 2020”, reports the WSJ.
3️⃣ Inventories at general-merchandise stores were at an all-time high in July, up 30% from a year earlier, according to the latest data from the U.S. Census Bureau. What does it mean? Increased inventories are linked to delays in the supply chain—followed by an abrupt improvement—which have meant that “a few seasons” worth of goods are landing in the marketplace at the same time.
While the costs and delays associated with transporting goods have eased, retailers will likely be fighting for a shrinking pie given consumers’ worries over the economy and inflation.
🔴 Wine Market Update
(MoM = month on month)
Livex 100 (MoM):
Livex 1000 (MoM):
Champagne 50 (MoM):
1️⃣ There doesn’t seem to be an end in sight to how much the Champagne prices are increasing in value. Liv-ex reports that Champagne outperforms mainstream equities — that’s not difficult as the S&P 500 is down 20% year-to-date.
However, that the Champagne market is seeing a virtuous cycle is undeniable. In the last year, as can be observed in the chart from Liv-ex, the top 50 champagnes outperformed even Burgundy for the second year in a row.
Collectors might feel quite nervous, then, about investing in a bottle of Champagne at the moment. Is the bubble about to burst? A looming recession, a panicked stock market, a cold winter ahead of us and a war at the doorstep of Europe – can we expect the Champagne market to continue its run, or to hold its value?
A few reports below to answer that question, including the one I co-authored with Six Atmospheres’ Tom Hewson.
2️⃣ What are the overvalued Champagne names?
For starter, the back vintages of Salon Le Mesnil-sur-Oger Grand Cru have risen the most (2006 +142.0% and 2007 +140.5%, while the 2004 is up 113.7%).
Louis Roederer Cristal Rosé 2008, that has 100-points from The Wine Advocate’s William Kelley, is up 88.8% over the past two years.
Grower Champagne has joined the hype game, thanks to Kelley, with canny buyers eyeing up the secondary market, spurred on by the astronomical increases in price achieved by the likes of Jacques Selosse, Egly-Ouriet, Ulysse Collin and Cedric Bouchard.
On average, the 2008 vintage rosés trade at a 96% premium when compared to their white counterparts across the six most-traded houses, with Louis Roederer Cristal’s 100-point rosé, which costs 112.7% more than the white.
However, rosé Champagne prices have only risen 29.0% year-to-date, compared to 52.3% of the benchmark index — the Champagne 50.
A few reasons for this premium could be:
The production of rosé requires a different winemaking technique from Champagne producers;
Many of the reputable houses have made investments in the vineyards that supply them with red grapes;
Volumes are limited, both because of planted red grapes (only 38% of total vineyards are of Pinot Noir) and because of legacy reasons.
However, this will probably reverse: as climate change impacts Champagne, we can expect an increased focus on the production of Blancs de Noirs and rosé Champagnes.
New Champagne Reports
🔴 ‘Is it worth investing in Champagne?’ (Six Atmospheres)
In this piece, Tom and I look at the economic drivers for investing in Champagne. It’s hard to find pockets of value in a rising market – more so than in a down market.
However, market dynamics as well as supply and demand point at staying laser-focused on a few names that can weather the storm of a recession, offering better downside protection with the potential of increasing in value in next five years.
An economic downturn will likely favour wines with a stable track record, a strong brand recognition and, perhaps more importantly, liquidity to sustain a period of relative instability – all requirements that are met by large Champagne brands.
Trades on Liv-ex indicate that wine merchants are trading some of these Champagnes at prices that are close to the retail in-bond prices, suggesting perhaps that wine merchants are confident they will be able to shift such wines at increasingly higher prices in the near future.
It looks like the only vintage since 2013 likely to go down as a classic will be 2019. Perhaps investors know that we may all be feeling a little starved of top vintages in a few years’ time.
🔴 ‘Champagne vintages to buy now’ (Club Oenologique) by Essi Avellan MW
Wines from the much-hyped 2008 vintage have largely lived up to their billing. In the shadow of the mighty 2008, neither of the fine vintages of 2012 and 2013 have received the attention they deserve.
2012: quite magnificent, a vintage hard not to like in all its powerful, compact fruitiness and energising freshness. It is a vintage that tastes delicious immediately but has all the building blocks of longevity.
2013: it sits somewhere in between the concentrated 2012 and the acid-lined 2008, promises tension, acidity and longevity.
2014: shows promise but variable (among the great ones: Bollinger’s La Grande Année, which really nailed the year with its minerally elegant and vivacious)
2015: was widely declared, a great number of the wines show unripe aromatics characterised by austere vegetal or ashy notes, despite the warm weather.
2016: Chardonnay struggled to ripen in the year.
2017: harvest spoiled by rains and rot.
2018 - 2019 - 2020: return to variable good results.
🔴 ‘What Makes a Champagne Vintage Great? Ask a Deep Learning Model’ (Wired)
Referring back to Bollinger’s La Grande Année 2014, which launched to market this year, Denis Bunner (deputy chef de cave) says the only parameters that really count are those determined in the nose, mouth and … by deep learning.
A decade ago, Bunner began working on a a six-year project to model data from the Bollinger’s Wine Library, a unique collection of vintages going back generations that had been compiled from stock lying for years in the far reaches of the house’s cellars. The reason — climate change, the biggest fundamental risk and something that is already causing noticeable changes in the Champagne industry.
More than 40 parameters are included in the model, such as:
historic meteorological data;
plant conditions for each grape variety;
timings of key seasonal events like de-budding, blossoming, ripening, and harvesting; and
lab analysis (for factors such as sugar levels and acidity) of grape musts and the wine itself.
This data can now be correlated against the assessment of Bunner’s tasting notes for a century’s worth of champagne in the Wine Library, effectively a definitive judgment on the quality of each vintage.
“We were looking at the evolution of the vines and the ripening season, segmenting each step to find a correlation between the growing process and the final quality,” says Bunner. “We can see precisely week by week what should be the perfect scenario, and the farther from this you go, the more risk you have.”
Using this model, says Bunner, the strength of a season can be forecasted as they cut the grape during the harvest, adding an element of statistical predictability to what is otherwise a slow, intuitive reveal over months of tastings. It can help with other decisions such as whether to declare a vintage year; whether to make a limited edition if a smaller number of villages perform well; what the blends will be; and—crucially—how well a vintage might age.
Back to climate change, Bollinger have no shortage of tools with which they can adapt: lowering the sugary “dosage” that is added to each bottle after disgorgement; changing the grape varietals and the rootstock; even the time of day that grapes are picked.
The point of the data model, he says, is to pinpoint the events that most clearly impact the quality, in order to make the best adaptations.
The next step is to apply the learning to seasons in real time, as decisions are made over the management of the vineyards themselves.