Pouring into the red liquid market offers tasty returns

A COMPOUND annual growth rate of 15 per cent since 1999: sounds good, doesn’t it? It sounds even better when you find out that’s higher than US and UK equity markets and comparable only to property without, er, being property and suffering its recent fate. Surely it can’t get better than that? Well, actually, it turns out it can. Mainly because it’s wine – and red wine to be more precise.

Investors are pouring into this liquid market. You might imagine it to be the preserve of continental types who “know wine”, but the industry is maturing into something the average trader will feel more comfortable with. Buying en primeur now looks more like buying a futures contract, particularly when you’re sat at home trading it on an online platform.

For those socialised in the ways of the City, fear not, there’s an index. The Liv-ex Fine Wine 100 offers a benchmark. It tracks the price of the world’s 100 most sought after wines. Launched in 2001, it’s climbed 200 per cent – remarkable considering the financial crisis, and the slight set back it had due to this.

The source of this growth is China. It turns out they are crazy for Bordeaux. So much so that the 200-year old vineyard Lafite Rothschild have confirmed that its labels will now feature Chinese characters.

Many say this means you have to be a China bull to think the wine sector is hot. That might be true. But Joe Marchant from Bordeaux Index insists not: “Investment from the high net worth community in Europe and America is growing fast too.” He’s not wrong about them raking in the cash: economists Thomas Piketty and Emmanuel Saez have collected data that shows that the inflation-adjusted income of the top 1 per cent of US households grew more than ten times faster than the income of the bottom 90 per cent of households over the majority of the last century. A good sign for those hoping to sell a case or two of fine wine.

Another popular concern about wine investment is – somewhat bizarrely – the link between the wine and the crude oil price. Research by the International Monetary Fund economists Serhan Cevik and Tahsin Saadi Sedik shows that the two correlate. Wine, like crude oil, is sensitive to macroeconomic shocks. Oil prices and the Live-ex Fine Wine index both fell in tandem during the downturn, and then surged back up, increasing by 86 and 62 per cent respectively between January 2009 and June 2010. The authors of the report anticipate that this means that a 4 per cent fall in industrial production in emerging market economies will mean a 22 per cent decline in real crude oil and 15 per cent fall in wine.

Marchant says this is misleading: “You can correlate anything if you’re selective about the time frame and data.” Wine, for instance, has not spiked anywhere near as much as crude oil over the current unrest in the Middle East. Not to mention that wine production has not been keeping pace with demand for sometime. Worldwide, the areas planted with vines receded by 1.6 per cent from an average of 7,971 thousand hectares in the 1990s to 7,823 thousand hectares in the 2000s. Rising demand, falling supply. Sounds like the most wonderful mix. And just think, even if it all goes wrong, at least you’ve got your hands on a good tipple to help you drown your sorrows.