Analysis, Market Tools, Tools
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Value & Risk in Fine Wine, Post 3: The Channel Spread

Recap: Last time we started with a broad selection of Bordeaux fine wines across five investment categories. We then used a simple algorithm to re-cluster the wines based on price characteristics. From each of these new clusters we selected a wine to play with. We are looking at  Margaux, Clerc-Milon, La Conseillante and Lafite Rothschild.    


 

Sometimes simple tools are best. At least to start with. Given the Liv-ex data we have, here’s an obvious thing we can do: let’s compare ex-Château release prices with London release prices.

The intuition is that a large positive gap between London and Château release prices signals oversubscribed interest for a young wine. This might be explained with reference to the “animal spirits” of an investment bubble.

Alternatively, the gap might be explained by market fundamentals: a new wine may be considered fundamentally superior to recent vintages.

We call the gap between the London and Château release prices the Channel Spread. The following graph shows a history of the Channel Spread for our four selected wines.

channel_spread

Looking at the smoothed channel spread over time suggests a complete peak to trough market cycle from 1996 and 2010 followed by another trough (bear market), which is the state we are currently in.

The specialness of Lafite Rothschild is underlined here. In the bull market from 2007 to 2010, its Channel Spread ballooned.

We can see the spreads of Margaux and Lafite moving in parallel from 1996 to 2007, but then demand for Lafite moves disproportionately in 2008. The new relative levels are sustained until 2010, then we see a fast correction to normal (relative) levels in 2011.

Since 2011, the Lafite spread has been unremarkable, back on par with the Margaux spread, where it was last in 2007. It seems reasonable to believe that the extraordinary dynamics of Lafite from 2008-2010 were driven by the special status it enjoys in East Asia.

The Channel Spreads for Clerc-Milon and La Conseillante seem less sensitive to an overall market cycle. We’ll have to wait a few years for more data to arrive to say anything reliable, however.

The plot suggests the situation in 2014 was similar to the situation in 2004, when spreads in all the wines were also aligned. Does this signal the beginning of a new ten year cycle? Ask us again in 2020!

Summary: The “Channel Spread”

Channel Spread plots tell a story of London market demand given ex-Château release prices. Over the last two decades, the Channel Spread plot for our selection of fine wines indicates a ten year boom-bust cycle. A (relatively) inflated Channel Spread high above a smoothed average may indicate a bubble in a particular wine.

 

MK @ WineQuant

Credits: Data from Liv-ex.

Creative Commons License
Value & Risk in Fine Wine by WineQuant is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. Based on a work at https://winequantblog.wordpress.com/.

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WineQuant is an independent research-led forum for wine enthusiasts, traders and investors. Our mission is to see the present more clearly and peer into the glass a bit more imaginatively.

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