Vintage heaven; vintage hell

The transformation of Fine Wines

As you raise a glass of Chêne Bleu Rosé on a sizzling hot summer’s day, spare a thought for the wine industry, which is facing a perfect storm.

Global warming, increasing regulatory pressures, and disinvestment, are set to dent if not destroy what had seemed a simple story of emerging markets growth and increasing quality which would lead global wine consumption to reach $207bn in 2022.  

But the overall global wine and spirits market has slipped by -1.4% in the last five years, according to industry body IWSR, and disruption of the status quo is set to accelerate.  In the US, 54 per cent of the population chose to abstain from alcohol, driven largely by 21-34 year olds, according to a 2018 Nielsen Survey.

Parallels with the tobacco industry are not an exaggeration. Imagine a photograph of a liver riven by cirrhosis on a plainly packaged bottle of wine, along with a warning that alcohol can abet breast cancer. Inside, the magnum of Château Kirwan lies, un-drunk and unloved.

Demand for wine in developed markets is under pressure from older generations who are drinking less and younger generations who prefer cocktails and don’t buy into the elitist, obfuscating language used by connoisseurs. Millennials and Generation Z are in any case also drinking less, as evidenced by the drop in turnover at university bars and the increased availability of non-alcoholic cocktails and beers. Hashtags such as #sobersaturday are trending. The ever-widening legalisation of cannabis is another factor in wine substitution.

Health is on the global agenda, with the World Health Organisation (WHO) using increasingly alarmist language about the effects of alcohol, and cash-strapped governments looking more closely at the costs of ill-health from excess use and, in parallel, the benefits of increasing so-called sin taxes. This is affecting investor behaviour too.  KLP, Norway’s largest pension fund with $80bn under management, announced in May that it would divest from any company that made more than 5% of its revenues from alcohol. French champagne and wine house LVMH and beer giant Heineken are among those affected. It is likely that this policy will spread as Scandinavians generally lead the way on Environmental, Social and Governance (ESG) investing.

Meanwhile, climate change is harming crops, disrupting supply chains and eroding corporate profits. This summer’s European heatwave is likely to be the norm, not an exception, while global cooperation on climate change lies moribund amidst the wreckage of the post-Second World War order. Disorderly trade patterns – be it between China and the US or Britain and the EU – add to the confusion. The door to the fastest growing wine market in the world slammed shut in the face of the US wine industry when President Donald Trump imposed tariffs on China.

Can the industry adapt? Over two sun-drenched days in Bordeaux, 70 winemakers, technologists and reviewers from around the world, came together for a convivial brainstorming on Fine Wine’s evolution. Organised by ARENI, a wine institute, many of its conclusions were just as relevant for the broader wine industry and, potentially, for other consumer companies.

Navigating a future where sustainability and inclusiveness are among the paramount values is crucial to its survival. That means clarity on everything from the wine-growing process to the treatment of the seasonal labour who pick the grapes, along with an openness to sharing information via blogs and tech solutions like the Global Wine Database (GWDB).  Even information that may seem ridiculous. “Your millennials want to know the name of the wine maker’s dog - it’s true!” exclaimed a 27-year old sommelier from New York.

Websites like Wine Folly use straightforward language and by so doing are creating new enthusiasts, as are wine bars with top wines by the glass via the clever Coravin system, which doesn’t damage the cork, and apps like Palate Club. Champagne houses like Moët & Chandon are enlarging their offering to a younger clientele by offering a cocktail-like experience. Ice Impérial, a sweeter champagne poured over ice, is the result. Wine makers are exploring lowering the alcohol content without compromising on taste and signing up to wider industry campaigns to advise consumers on drinking responsibly.

China is set to become the second largest wine market after the US and by 2022 its value will be over $19.5bn, reports IWSR. Prestigious winemakers are taking the opportunity to make local wines to feed the increasing appetite of the growing middle class. Château Lafite is launching its first Chinese wine, Long Dai 2017, later this year. In India, private equity group Visvires Capital expects wine tourism to be a source of revenue. The business plan for its four vineyards includes an estimated 300,000 visitors over the next three years for wine tastings, restaurant meals, hotels stay, and wine buying.

 Global warming is an opportunity, as well as a challenge. English wine evoked sniggers when it started; wines like Chapel Down from Kent are now classified as Fine Wine and sell at premium prices. Spain’s Bodega Torres has been buying land at higher altitudes. Nordic wine could be the next discovery. 

On the back of an uncertain future, the Fine Wine industry is acclimatizing to a new world. Let’s raise a glass of Château Talbot to toast its journey. 

Hank Paulson’s take on the financial crisis

JP Morgan’s Dimon on trial; business opportunities in Libya

Reading former US Treasury Secretary Hank Paulson’s gripping account of the 2008 financial crisis while playing at cowboys in Colorado’s Rocky Mountains was perhaps not as much of an incongruity as it seemed.

As we rode by a vertiginous cliff, I ruminated about On the Brink, the former Goldman Sachs CEO’s aptly titled memoir of the race to stop the collapse of the financial system.

What emerges from the book is how close we came to a total breakdown, how well the team of Paulson, New York Federal Reserve President Tim Geithner and US Federal Reserve Chairman Ben Bernanke worked together, how irresponsible Congress was and what an outmoded mishmash of regulatory bodies governs the US financial system.

What is worrying is how little has changed, not least the fact that the largest financial institutions have become even larger, more interconnected and more complex, posing unimaginably big risks to the global system. JP Morgan Chase, which acquired Bear Stearns and Washington Mutual during the crisis, now has a market capitalisation of $206bn compared to $157bn in 2007, before the financial crisis. Its total assets are $2.3tr.

That makes it all the more disquieting for Jamie Dimon to have held on to his dual roles of CEO and Chairman in a shareholder vote in May via the implied blackmail of his departure from the bank.

We learned a lot about cowboys at glorious Vista Verde ranch. The lone Marlboro man from the old advertisements is a myth. Herding cattle is a group exercise, as is running a bank. Dimon may have been brought up on the East Coast but he would do well to head West for a lesson, accompanied by supine shareholders and, for that matter, some regulators.

A harsh judgement? If Fred Goodwin, the former boss of bailed-out Royal Bank of Scotland, had not been as powerful, his shareholders as greedy and his regulators as unwitting, he might still be Sir Fred.

Timely excerpts from the book include Paulson’s account of how in August 2008, while in Beijing for the Olympics and severely preoccupied about the health of government-sponsored mortgage finance duo Fannie Mae and Freddie Mac, he learned that Russian officials had made a top-level approach to the Chinese suggesting that together they might sell big chunks of their holdings to force the US to use its emergency authorities to prop up these entities.

The Chinese declined to cooperate with such reckless stupidity.

Last week President Barack Obama cancelled his planned summit with President Vladimir Putin as the Cold War continues, albeit in a rather more farcical way with the delicious irony of National Security Agency whistleblower Edward Snowden’s political asylum in Russia.

Still, the Chinese are not always the good guys. A large agricultural vehicles manufacturer from the West was launching a new model at a trade show. Two stands down, it found the Chinese had produced the same one at half the price. The company had hacked into their computer systems and stolen the blueprints, according to Mark Shepard, Head of EMEA for iSIGHT Partners , a cyberthreat intelligence agency.

When I put to him that boutiques like Robinson Hambro were surely not on anyone’s radar, he noted that we had a very juicy database of the great and the good.

“We’ve all got something that in the dark cyberworld market has value,” he said.

There is a lot of value in the Middle East and North Africa (MENA) even as the press focuses on Syrian carnage and the Egyptian upheavals. Arabia Monitor one of the most influential research companies on the region, has just published a report titled “Algeria, Libya, Iraq: the next big spenders.”

Highlights include the fact that with a combined population accounting for a third of MENA, and an average GDP growth of 9% this year, Algeria, Libya and Iraq together are set to emerge as the next big retail spenders. Founder Florence Eid notes that “as an expanding middle class becomes more sophisticated, opportunities emerge for international retailers to offer new shopping experiences, with sales growth expected to reach 14% per annum in 2012-2016.”

Although she does not dismiss the security risks, Eid believes the retail market in these countries will offer substantial rewards for early movers able to absorb operational risks.

New Bank of England Governor Mark Carney said last week that he found the dearth of females on the Bank of England’s influential Monetary Policy Committee “striking”. He aims to help change this to pave the way for a qualified female governor in years to come.

Things are different on the other side of the pond. The US, if the best candidate is chosen, will see Janet Yellen take over from retiring Federal Reserve Chairman Ben Bernanke in January. Although no-one can dispute rival Larry Summers’s brilliance, he is a controversial figure with a penchant for outspokenness and a reputation for freezing out those he does not agree with. These are not sought-after attributes in a central bank governor.

Federal Reserve Vice Chair Yellen, however, is an exceptional forecaster who is not afraid to disagree with the majority view and is steeped in central bank culture. As an added bonus, Yellen would be an outstanding female role model at a time when research has proven the benefits of having women in senior positions.

This is one of the reasons I sit on the judging panel of Women in the City an organisation that aims to promote talented women. We are currently seeking nominations for our annual Woman of Achievement Awards in sectors ranging from law to banking. We are looking for women with proven leadership abilities who have gone out of their way to help other women in their organisations prosper.

If you know of any, do please fill out the short form by clicking on this link .

Nominations close on September 20.

The Tale of a Whale

The precariousness of JP Morgan Chase

The New York tourist sitting next to me with the map of London spread out on his lap asked where he could find the London Whale. Seriously. Unlike the London Eye, I told him, the London Whale was a human being, albeit a metaphorical landmark.

The London-based JP Morgan Chase trader’s nickname derived from his large positions in the credit market, which in the summer of 2012 resulted in the bank declaring a $5.8bn loss. It subsequently faced major fines from both the UK and US regulators for, among other things, its lax supervision and for not “adequately updating” its audit committee on the findings of an internal review, in the words of the Securities and Investment Board (SEC). The bank agreed to around $20 billion in legal settlements in 2013, almost equal to a typical year’s profit, for a range of misdemeanours.

Bereft of its gobbledygook, SEC’s phrase can be translated as “deceitful behaviour.” In other words, culture.

A recent survey highlighted that two thirds of global banks agree that a big part of the financial crisis was due to culture but only one third of banks thought there was anything wrong with their culture (my italics).

Transforming an institution’s culture is a lengthy journey, rather like chasing Moby Dick, the symbolism-laden whale in Nathaniel Hawthorne’s classic book of that name. As well as obvious factors like overhauling compensation, banks need to exercise integrity through sound judgement and rewarding decision-makers who have the guts to say no.

A very sensible suggestion on culture put forward in the Salz Review (an assessment of what went wrong at Barclays Bank pre and post the financial crisis ) was for bankers to spend two years on secondment to the financial regulator and vice versa. It appears to have sunk without a trace, despite the fact that there is a model for how to do it in the Takeover Panel, the UK’s M&A regulator, which regularly hosts top bankers and lawyers who then return to their firms.

Box-ticking is not the way forward. Unfortunately, though, the plethora of rules spewing forth from different regulators, like water from a whale’s blowhole, makes it overwhelmingly necessary. How else can universal banks active in a number of countries deal with the US’s Volcker Rule, the UK’s Vickers, the EU’s Liikanen, let alone Basel III, which appears to already be disintegrating? In fact, each country seems to be setting its own rules and banks are retreating home, capital in tow.

To add insult to injury, no sooner have banks complied with a rule that the regulator changes it. The Basel Committee admitted this autumn that perhaps securitisations per se were not “bad.” Without saying it in so many words, the implication was that forcing banks in 2009 to post higher capital requirements against them – as though all securitisations were similar to sub-prime mortgages – was wrong. The Committee is set to review the issue sometimes in 2014.

Meanwhile, the absurdity of zero or very low capital requirements on holding sovereign debt has steered banks to load up on it. This may be very useful for over-indebted governments, but as Jens Weidmann, President of the Bundesbank noted late last year, “the current regulation’s assumption that government bonds are risk-free has been dismissed by current experience.”

In truth, it doesn’t take familiarity with the last few years to realise that ‘risk-free government bonds’ has always been an oxymoron. In the best of cases their value has been damaged by inflation or currency devaluation; at the worst it has been destroyed by restructuring or default.

Moby Dick evaded his pursuers, but most of the crew of the Pequod, the whaling ship, met their death because they dared not stand up to Captain Ahab and his lack of judgment.

JP Morgan Chase’s Chairman cum President cum CEO Jamie Dimon – yes, truly three titles – admitted a few weeks ago that some investigations into the bank were just beginning, which does not bode well for 2014 results.

In May Mr Dimon fought off a shareholder revolt that would have seen him lose his position as chairman by letting it be known he would walk from the bank if this happened. The blackmail worked. He kept his triumvirate of titles and continues to lead the largest bank in the US.

This is a sell notice. It has the same whiff of omnipotence that marks the reigns of presidents who succeed in changing constitutions to allow them yet another, and another, and another term in office.

The Pequod had a problem of culture. We shall see how the tale unfolds for some of the banks, not least JP Morgan Chase. But the omens are not good: absolute power really does corrupt absolutely.*

*This column originally appeared in The Dialogue Review, an academic journal.

The CEO’s case for rocketing equity markets

Middle East and Korean peace in the offing

A year after writing about the unsustainability of the French economy, I found myself this August once again amidst the glory-on-earth that is inland Provence. The economy is in worse shape, even more of the profit-making elite have left the country and President Francois Hollande is beyond a blancmange.

Demand for places in the South Kensington Lycée is such that a new one is being built near Wembley football stadium. London’s gain is France’s loss.

And yet I join a select group of forecasters who have to date been proved wrong. We continue to hammer away at our theme of the bankruptcy of the French state while enjoying the delights of long lunches with saucissons de sanglier, the local rosé and the dream of owning our own estate. The head and the heart do not always move in sync. Why France will fall next.

The time to invest in equities is now. Ignore the pundits who declare them overpriced. Dismiss the majority view which emphasises these five certainties: anaemic world growth is set to persist for the foreseeable future; China is set to become a superpower; the North-South Korea stand-off is unlikely to change anytime soon; US supremacy is at an end; the Israel-Arab conflict will endure.

Instead, read the fascinatingly contrarian world vision that a well-known, cerebral CEO recently shared with me.

“China will struggle more than many investors expect, particularly in the context of what could be the Asian strategic surprise of the next few years: Japan. Chinese growth well under double digits at 7-8% will not be enough to sustain the socio-political compact which has kept it as a unitary state with a quiescent population. The subversive power of the internet, growing income inequality devoid of the hope that a rising tide will lift all boats, local corruption, Muslim extremism in some provinces and regional separatism, will lead to domestic problems which the Communist Party will not be able to contain. It could lose power while the country messily breaks up into smaller areas of influence, although it is worth keeping in mind that “smaller” in Chinese terms is still large by any other.

The Koreas will unify as the Chinese reconsider the cost of supporting the existing North Korean regime. South Korea will pay for re-unification, just like the West Germans paid for the East. After a decade or two of domestic integration focus, Korea will be born as an even more powerful economic entity, playing a much larger role on the world stage.

The US looks set to continue as a superpower. With the Republican Party in a mess, Hilary Rodham Clinton could be elected on a landslide at the next election, bringing the House along with her. The US will continue its upward trajectory, based on cheap shale gas and its flexible, innovative economy, with no one country able to challenge it.

Peace is due to break out in the Middle East within the next 3-5 years as the Shia axis surely will be broken when Bashar is ousted. He may not be out of power yet, but the prospects of continued Alawite domination of Syria (12% of the population) grow dimmer by the day as Sunni support for the rebels continues to grow. Syria’s fall would effectively defang Hezbollah and creates much improved prospects for peace with Israel. The new military government in Egypt may transition into a civilian government over time, but likely will continue to curtail arms trafficking across their border into Gaza, further weakening Hezbollah. Shia Iran, the main backer of Hezbollah, would end up being further isolated and surrounded by Sunni powers.

The Arab Spring has brought to the surface the main threat to existing regimes in the Arab world: a lack of growth and diversification with its consequent unemployment, especially youth unemployment – under 25’s being the largest (and growing) segment of the population in the Arab world. The monarchies and dictatorships have used the conflict with Israel as an excuse for their lack of progress, but this is no longer enough.

Peace with Israel will allow the focus to shift to growth. Informal approaches to Israel from the Saudis have already been made. For Israel, which does not have the military capacity to fully disable Iran’s nuclear capabilities, a comprehensive peace settlement may have allure. Not least because Arab Israelis are set to be a majority of the population within a decade.

The confluence of these unexpected factors, including the enhanced power of the US and the shock of a Middle East and Korean settlement, means equity markets will take off on the back of the boost to world growth.”

Hopefully, this radical vision will more likely happen than this Column’s dire French predictions.