Liv-ex: signs of recession showing also on the secondary fine wine market in 2023

Last year, 2021, was an exceptional year that broke all the records, but 2022 has definitely put the fine wine market to the test. The end of the Pandemic emergency has meant that the economy has restarted, but not the supply chain. The reason for this is mainly because of the Chinese policy, which is aimed at zero infections, as well as Russia's aggression in Ukraine that has created considerable problems for raw materials. Above all, though, runaway increases in energy costs and the inflationary dynamics have hit all of Europe the hardest. The result is that the world is looking at the new year, 2023, but harbors a well-founded fear that an economic recession seems inevitable.

The impact on the secondary fine wine market would appear minimal, at first glance. However, the signs of an economic upheaval are becoming more evident. The growing sentiment is that last year’s momentum has already petered out. The Liv-ex 100 index fell in July, for the first time in 18 months, and then again in October and again in November of 2022. The Burgundy 150 index also showed smaller increases during the year, registered no growth in October and finally, a decrease in November 2022. Further, prospects for 2023 are looking increasingly gray, to the point that amongst the members of Liv-ex, the reference point for each collector or investor, some pessimism prevails, and two of them foresee a 25%drop in the Liv-ex 100 index. Another reason the future is so uncertain is due to conflicting signals in the present. That is to say, it is true that some wines have reached unprecedented prices, but it is just as true that at certain prices, the number of investors decreases.

The good news is, as the Liv-ex report has stated, that fine wines are stable, despite the turbulent situation. They are assets destined to decline, but this is a fact which encourages long-term storage, fine wines are essentially a low volatility investment, giving them advantages over traditional investments, especially in tumultuous economic times. As a matter of fact, all the main indices have grown since the beginning of the year. The Liv-ex Fine Wine 100 and the Liv-ex Fine Wine 1000 indexes have both reached new highs. The latter was driven by Burgundy 150 and Champagne 50, which outperformed all other forms of investments, except oil, over the past three years. The number of wines traded on Liv-ex is growing (+2.4%), although much less than last year (+10.4%), while in absolute terms, and therefore, including the various vintages, the number is lower compared to 2021, meaning that investments have focused on fewer bottles.

Bordeaux's market share, instead, has continued its same trend over the past decade, and has fallen to a new low in 2022. Gironde wines accounted for 34.5% of the total trade in value, down from 37.7% in 2021, and was definitely a subdued vintage, at lower prices than the en primeur, which didn't help. In terms of trade, Bordeaux wines weren't the only ones to drop, though. Market shares in Tuscany, Piedmont, California and the Rhone also decreased. As a matter of fact, during the year it became evident that California and the Italian Regions’ market shares were on a downward slope. This situation is yet another consequence of collectors reducing their focus to a smaller number of wines and vintages. Reduced market shares are the result of the market's relentless focus on Burgundy and Champagne. The share of Burgundy wines grew from 22% to 26.2%, while Champagne’s share soared from 8.8% to 13.7%, both hitting records. It’s worth it to note that since 2020 the market has grown in value and volume and even though Italy and California have lost market shares to Burgundy and Champagne, the total these Regions traded in value was still higher than in 2020. It may seem like a contradiction, but the prices Burgundy and Champagne reached could probably revive interest in Bordeaux, which has high quality wines, very good volumes and at (generally) accessible prices. Returns are not immediate, but historically the Bordeaux Chateaux have almost always proved to be an excellent, long-term investment.

Observing other regions, the Rhône, instead, currently offers the most convenient entry price on the fine wine investment market, at an extremely favorable quality/price ratio. Additionally, in spite of the drop in their market share, many Liv-ex members have emphasized resilient investor interest in Italian and US wines, which they expect will continue forward.

The crash of the Sterling Pound against the US dollar played a very important role in the analysis of the Liv-ex trend in 2022. In September, the Sterling Pound reached an all-time low, and in that same month, US investors pushed the Liv-ex 100 and the Liv-ex 1000 indexes to their best results since January: +1.9% and +2.1%. However, even in this case, all that glitters is not gold. The risk is the same as what happened in the following months, and on the other side of the ocean a further drop in the Sterling Pound is predicted to return on investments, creating uncertainty and instability on the market.

The Liv-ex 1000 and all its sub-indexes also grew in 2022, as predicted, and the Bordeaux 500 registered the worst performance: +6.1%. On the other side of the fence, instead, the Burgundy 150 and the Champagne 50 indexes, reached record growth at +28.5% and +24.8%, respectively. In countertrend to Live-ex 100, the number of wines traded has also grown, +13.5% amongst Champagnes (totaling 677), and +1.2% for Burgundy wines, which are at the peak of seemingly unstoppable growth, since 829 wines were traded in 2018 alone (while that number was just 166 in 2012), which jumped to 1.488 in 2020 and shot up to 4.131 wines in 2022. The merit goes especially to white wines. At one time white wines were ostracized, because they were believed to undergo rapid oxidation. Now instead, they are showing an even better performance than red wines, and at a noticeably lower average admission price.

Actually, the real star of 2022 is the Champagne 50 index. It was the best performing index over 5 consecutive months, between June and October, and boasted the three most traded labels during the year - Louis Roederer Cristal 2008 and 2014 and Dom Pérignon 2012 - all from Champagne. On the other hand, Burgundy built its fortune during the first part of the year, continuing the trend that had begun at the end of 2021, leading some wines to incredible three-digit growth (as Liv-ex Power 100 has told us in detail).

The dizzying price increases of Burgundy wines, backed by a considerable gap between supply and demand, has consequently decreased the number of collectors who can afford to invest in the most quoted bottles. This situation slows down bargaining, and produces an obvious negative effect. In the summer, the Burgundy 150 index started to show signs of sluggishness, growing only + 0.7% in October, and falling 0.9% in November. The Champagne 50 index also experienced a similar dynamic — in November it dropped 2.5%, thereby destroying two months worth of increases, and risking a sudden slowdown on the market.

The changes on the market are focused not only on territories and wines, but also on collectors and investors of fine wines. This market is now within reach of a great number of people, and boasts tens of thousands of wines listed, many of which are available at absolutely accessible prices. Young people and women are approaching it more and more, predominantly through trading apps, which make an asset like wine accessible even to those who have less expertise on the subject. The market trend between the end of 2020 and throughout 2021 has brought a new influx of professionals, at a level that hasn’t been seen since the bull run led by China in 2010.

Moreover, not everything stopped during the Pandemic emergency. Several sectors of the economy continued to generate wealth, expanding the ranks of the so-called High Net Worth Individuals, or "individuals with high net worth" (over 5 million euros), which is directly linked to growing investments in alternative assets such as art and wine. Technology has also accelerated this process, leading fine wines to link themselves more and more to the world of NFTs and cryptocurrencies. Wealth management services offering wine-related token wallets or NFT wine clubs have shown a significant increase, especially in the United States, Singapore and South Korea. As far as production is concerned, companies such as Penfolds and Dom Pérignon have offered special edition bottles as NFTs that can be paid for in cryptocurrencies, while Domaine Liger-Belair and Jacques Selosse are among several Estates that have joined the Wokenwine NFT platform.

Recent reports, though, are warning the secondary fine wines market about cryptocurrencies, which the Financial Times defines a "vehicle of pure speculation", and about the staggering price increases of some Burgundy wines. Liv-ex's end-of-year report underlined a passage from the Deloitte report on the art world, which could explain the risks that various Burgundy wines might be facing. “The fear is that market speculation on younger artists could threaten future sustainability… Some art market pundits see speculation on younger artists as unhealthy and unsustainable. It is feared that collectors and investors will get lost in search of the next big thing, i.e., one that will push prices far beyond the limits justified by the careers of these artists”.

The question we need to ask ourselves today is, going toward the future, will there be enough buyers and money to support the current prices of fine wines? The answer is, probably not, because no matter how much wealth was created in 2021, 2022 has distinguished itself for the enormous destruction of savings, and billions of euros lost in stocks and bonds. In a recent survey, Liv-ex members highlighted their fears. A global recession, rising logistics costs, foreign exchange volatility, and the loss of consumer confidence are the top challenges facing trade in 2023, and realistically, none of these will lead to an increase in prices. Looking at the trend of the Liv-ex indices in more detail, another critical issue is the number of wines that have appreciated, compared to the total number of wines on the market. Although the Liv-ex 1000 index has increased over the past year, the number of wines that increased in price on a monthly basis has steadily decreased since August 2021. Furthermore, as of November 2022, as many as 44.9% of its members have registered a drop, while only 42.8% increased, leaving 12.3% of prices unchanged.

In conclusion, according to the Liv-ex year-end report, the prospects for 2023 are not the rosiest. Market volatility is bound to remain high. Nevertheless, there are several positive aspects for the fine wine market, which continues to offer some stability in respect to the inflation increase, which in turn leads to an increase in interest rates that will reduce the propensity for risk, especially concerning a minority of wines (the more speculative ones), more than on the market in general. Prices have continued to rise in 2022 in all Regions, and, in most cases, these increases have been steady, which means investments are reliable.

That being said, the market will nonetheless be facing heavy turbulence. Of course, no market can grow forever, and the latest signs have suggested that some Regions may have reached their peak, at least for now. Purchases have become more targeted and Liv-ex members have spoken of more "measured" customers, who "buy less, but better". Upon an even closer inspection, there are definite warning signs within the Liv-ex indices. As we mentioned, in November 2022 the Liv-ex 1000 index had more wines that have registered a drop in price than wines that have marked a positive evolution. Moreover, the technical analysis of the Liv-ex 50 index suggests that a decline is possible. The period of wild spending and investments seems to be over. Due to the scarcity of demand, the small pool of buyers of the rarest wines already has the wines they have always wanted in their hands, or bottles of wine so expensive that they can no longer be resold.