James MilesDirector, Liv-ex.com

The Fine Wine Investment Market – An Inside View

Saturday 5th November 2011Hong Kong International Wine & Spirits Fair

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What is Liv-ex?

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Liv-ex is the global exchange for fine wine merchants.

400 members in 33 countries Global marketplace

Price data, info and analysis

Storage & transport

Our customers account for 85% of world market.

A potted history

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• 2,000 years ago: Vines first planted in Bordeaux

• 900 years ago: UK becomes major export market for Bordeaux wine

• 350 years ago: Samuel Pepys first refers to a wine called “Ho Bryen”

• 150 years ago: Bordeaux 1855 classification

• 33 years ago: Wine Advocate first published

• 11 years ago: Liv-ex launches

The role of speculation

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• Wine is for pleasure but investment and speculation have always played a crucial role.

• They facilitate price discovery and liquidity and help producers to finance their crop.

• Transparency, driven by the internet, has democratised the market in the last 20 years, transforming it into a credible asset class.

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Today’s market

Merchants

Auctions

Other

Hong Kong

US$3.6b

US$408m

US$245m

US$163m

• Is worth US$4bn per year.• Merchants account for 90% of trade.• New markets have led to strong growth.

How to define fine wine?

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• A wine with:

o Secondary marketo Ability to improve in bottleo Long track recordo Critical acclaim

• For investment purposes, this means the 25 top Bordeaux chateaux and a handful of others.

• Eight wines account for 80%+ of leading wine funds’ portfolios by value.

Bordeaux wines accounted for 95% of Liv-ex trade in 2010.

The five First Growths account for 52% of Liv-ex trade by value.

Factors that influence price

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Factors that influence price

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In the last few years, the key influence on price has been China.

Economic conditionsNew markets

Vintage qualityCritical opinionBrand

Emerging market influence

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The investment case

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• Compelling supply/demand dynamic

• CAGR 14.7% over 20 years

• The best performing of the “SWAG” assets over a 20-year period

• Useful portfolio diversification characteristics

Best in class

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SWAG:

Silver

Wine

Art

Gold

Wine is the best in class over a 20-year period, combining high returns with low volatility.

No panacea

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• Low Liquidity – The market is small and dealing costs are high.

• Opportunity costs are high – Wine generates no income.

• Structural weaknesses – The post-trade infrastructure is antiquated and risky.

• Regulation – The market is not independently regulated and is still very immature.

• Emerging market exposure – Current buying is heavily concentrated in HK & China.

A correction underway

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On the turn:

After three years of uninterrupted growth, the market is down 15% in three months.

Lafite drives the market up...

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Lafite Rothschild was the main driver of the market, vastly outperforming its First Growth peers in the five years to June 2011.

...and down

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Since then, Lafite has also led the market down, with all recent vintages decreasing sharply in price since the summer.

A buying opportunity?

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Where next: The “Magical 20”

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A further broadening: DRC

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Conclusion

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• Fine Wine is now well established as an alternative asset class.

• The fate of the market seems likely to remain closely aligned to changing tastes in China.

• Could the value lie in the “Magical 20” or regions outside Bordeaux as the Chinese market seeks out a broader universe of wines?

Please visit us at stand 3D-B26.

Or visit our HK mobile site: www.liv-exhkiwsf.com