Empowering Collectors to be Investors
Shipwreck of the Chinese Stock Market May Lead to Sunken Treasure in the Fine Wine Market
By Sisi Liang and Joseph L. Breeden
The Chinese stock market has recently shipwrecked. And a lot of people around the world are in the same boat (or adjacent boats) feeling the pain. The Shanghai Composite rose by 44% in five months since January 2015, peaked in May and then dropped 21% in the next two months. It has sent a ripple through the rest of the world, causing a multitude of problems.
But in crises can come opportunities. From what we see in our wine analytics, we might have a buying window in the fine wine market — an alternative asset class that may provide attractive long-term returns because global demand exceeds consumption and because of the embedded price appreciation of vintages with time — or if you just want to taste that 1982 Château Lafite Rothschild.
Movements in the market for Bordeaux have recently been driven by Chinese wealth
Among the investment-grade fine wines in our database, we have discovered that the Bordeaux wines are the most driven by changes in wealth in China. The above graph shows how the Vincast™ Bordeaux Index compares against the Shanghai Composite since January 2013. The auction prices are adjusted for appreciation with age and wine quality to create a composite market index. Around December 2014, after a 47% increase in the Shanghai stock market index over the previous 6 months, more sophisticated Chinese investors may have diversified out of stocks and into other categories, such as fine wine. Subsequently, we see a 64% increase in the Bordeaux index in only one month, from December 2014 to January 2015. This surge of buying in Bordeaux may have dissipated as this group of investors finished pulling the available funds out of the stock market. Consequently, the Bordeaux market index decreased rapidly, falling 47% in the next three months, from January to April 2015. During these same months, the Chinese stock market continued to climb, experiencing another 39% increase. It reached its peak in May, and the bubble burst shortly afterward. During the burst of the Chinese stock market bubble, the Bordeaux index stayed relatively low as no more in-flow was available from the Chinese market.
US & European buyers provide steady demand for fine wines, but do not appear to be driving the volatility
During this same period, from January 2013 to July 2015, the U.S. S&P 500 has been increasing steadily. The U.S. and Europe still hold top places as major wine buyers, but they are not driving the volatility in Bordeaux, as shown in the above graph.
The "Lafite Bubble" shows that the Chinese investors can heavily influence the fine wine market
We as wine lovers still have vivid memory of the "Lafite Bubble" that happened between 2010 and 2012. The Chinese buyers showed an intense interest in Château Lafite Rothschild wine for a short period of time. During that time, Lafite underwent an astronomical price increase, the demand was high, and the "Lafite" name achieved the most privileged status in China. Counterfeiting became a huge issue around Lafite, with allegedly 70% of Lafite consumed in China at the height of the Bubble being fake [1].
We suspected that when the Lafite price came down dramatically in 2011 and 2012, it was because those buyers' interests went elsewhere, such as other wines or other types of investment. Some of these interests seemed to have gone to other wines [2]; however, the Shanghai Composite experienced a rise and fall at the exact same time as the Lafite Bubble. This means that at the height of the Lafite fame, the overall wealth and market condition of China was highly relevant to the demand of Lafite.
For more insights in the Lafite Bubble, see our previous article here.
The Chinese "Cash-Out" event has broad impact in the fine wine market
After the Lafite Bubble burst and the craze passed, interest went more generally into Bordeaux, as well as Burgundy and other wines with similar prestige. Both the wine market and the Chinese stock market declined slowly after the Lafite Bubble, until mid 2014. From June 2014 to May 2015, the Shanghai Composite rose by 126%. This dwarfed the 27% increase in the same index that coincided with the Lafite Bubble back in 2010 and 2011. The interesting aspect is that this enormous surge in the Shanghai Composite was not reflected in a surge concentrated in the Lafite market this time, though the first half of the climb in the Shanghai Composite — from June 2014 to December 2014 — seemed to have been accompanied by the wine market, led by Bordeaux. Particularly, in the same month, January 2015 (see red vertical line in the above graph), Bordeaux, Lafite, and Burgundy all experienced an increase of various degrees. This happened to be the only month during the entire period from June 2014 to May 2015 that the Shanghai Composite had a slight decrease, a mere 1.2%.
If these are a result of the more sophisticated Chinese investors diversifying and hedging their investments in the stock market, then we can possibly say that, as the wealthy Chinese are slowly warming to a wider range of fine wines beyond Lafite, the Chinese investors may gradually ease out of heavily influencing a small group of particular wines.
Fine wines are a natural long-term investment, because of the appreciation due to the maturing and increasing scarcity of the vintages (as we discussed in our first blog post). In the face of this embedded advantage, the trick is not to buy at a high. Unfortunately, those who invested in wine through 2008-2012 may well have lost so much that they can only hope to break even in the long run. Further, because of the comparatively long turnaround times between buying and selling fine wines, this is not a market one can easily "arbitrage". Rather, we should look for buy-and-hold opportunities. Because the Chinese stock market crash has brought down prices in the fine wine market, this market lull may be a good time to pursue that long-term investment strategy.
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Sisi Liang loves to find connections between seemingly unrelated ideas. Her curious mind has taken her to places from business strategy to entrepreneurship, from angel investing to marketing strategy, from metals mining equity research to regulatory stress test modeling in the largest financial institutions. She's a trailblazer and a ruckus maker. Sisi holds a BA in English and Mathematics double major, with Honors, from Washington and Lee University, and an MS in Quantitative Finance. She is also an alumna from Seth Godin's altMBA program. Her passions for forecast modeling, the poetic and commodity elements in wine, yoga, along with her curiosity in the interconnectedness in diverse fields have drawn her to the collaboration of auctionforecast.com. Email: [email protected] |
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Joseph L Breeden, PhD has been building forecasting models for over 20 years for such areas as currency futures, sporting events, agricultural commodities, and loans. The methods he pioneered in his book, Reinventing Retail Lending Analytics (2014) are considered are considered best practice in the industry and performed well through the US mortgage crisis and many other international economic crises over the last 20 years. His love of wine and data analysis led to his participation in auctionforecast.com. Email: [email protected] |
References
[1] "The Lafite Puzzle," by Andy Xie, http://www.ritholtz.com/blog/2010/08/the-lafite-puzzle/ .
[2] "New Insights into the Lafite Bubble through Vintage Modeling," by Sisi Liang and Joseph L. Breeden, http://www.auctionforecast.com/Blogs/Details/4.
[3] Joseph Mills, "Sea Change," Angels, Thieves, and Winemakers (Second Edition), 2015.
Yoga photo credit: Morgan Burnash