ART PRICES FINANCIAL CRISIS
With fear at near panic levels recently in the stock market, it would seem almost anomalous that life goes on in some segments of alternative investments. No, we’re not talking about hedge funds or commodities, both of which suffer the whiplash dealt by severe market plunges. Instead, welcome to the rarefied world of art collection and investment. Proponents of the segment argue that art, being a real asset and devoid of the mind-numbing complexity of derivatives, should retain its sheen as a ‘passion’ investment.
Art is tangible with inherent value says Christie’s
Says auction house Christie’s president (Asia) Andrew Foster: ‘We stand in a curious position. Art is a very real and tangible thing. Clients agree that art has inherent value. So you start with the proposition that it’s not a highly leveraged investment. That’s almost refreshing now.
‘That doesn’t mean prices don’t fluctuate, but value is agreed upon and inherent, and it springs from cultural and global trends more than trading multiples.’
Christie’s confident about November Hong Kong sales
Christie’s recently exhibited highlights of its upcoming Fall 2008 auction in Hong Kong, to take place at end-November. ‘Our sales are nearly two months down the road; we’re confident markets will calm down,’ says Mr Foster.
Art, however, isn’t that impervious to the fallout from the evaporation of trillions of dollars in stock market value. Nor is it immune to the belt tightening that has ensued as individuals brace for more difficult economic conditions.
But recent Borobodur and Sotheby’s Asian auctions disappointing
Two auctions of Asian art last weekend, for instance, fell short of pre-sale estimates. Borobudur Auction’s two-day sale of Chinese and South-east Asian art fetched nearly $10 million, compared with pre-sale expectations of $18 million.
The recent Sotheby’s sale of contemporary Asian art in Hong Kong was also disappointing, with a number of works unsold or drawing bids below reserve prices.
Citi Art Advisory – stock market drop causes short term bounce and longer term fall
Citi Private Bank’s art advisory service senior vice-president Suzanne Gyorgy says that a prolonged economic downturn will take its toll. ‘A downturn in the equities markets often initially causes investors to turn to tangible assets. The art market can benefit from this turn to alternative investments with a bounce in the value, counter-cyclical to the equities markets.
‘However, a prolonged economic downturn in the equities markets will first result in a softening of the real estate market which is then followed by a downward adjustment in the art market.’
Asia undergoing structural change: more collectors
Still, the last few years’ robust pace of wealth creation is likely to have expanded the catchment of wealthy individuals globally for whom art is a passion, particularly in Asia. Christie’s own Asian sales are a testament to this. Last year, the firm’s Asian art division reported sales of US$654 million, a 49 per cent rise from 2006. Growth has been at a strong double digit clip since 2004.
Asian art showed broad uptrend even in Asian financial crisis
‘What is interesting about Asian art, from the period which includes the Asian financial crisis and a downturn in the West . . . global Asian art grew every year through that period. The broad trendline is up. This isn’t a surprise, because all the long-term economic indicators and information about this century is that it will be an Asian century,’ says Mr Foster.
He concedes that wealthy individuals may have sustained substantial losses in equities in recent months. ‘People need to recognise the losses in the context of the gains in the last three to four years. We’re talking about a tremendous, unprecedented increase in global wealth. It’s natural to have a correction.’
Citi Art Advisory predicts softening for mid value works
Citi’s Ms Gyorgy agrees. ‘Today, with the vast amount of newly created wealth across the globe, even after this recent economic turmoil, we are likely to continue to see record prices for the remaining top tier master works . . . by sought after artists, but expect to experience a softening in value for mid-level works.’
Art captured second largest share of ‘passion’ dollar of rich
Passion investments merited a highlight in Merrill Lynch and Capgemini’s 2008 World Wealth Report, which found that art captured the second-largest share of the global wealthy’s passion dollar at 15.9 per cent, after luxury collectibles (16.2 per cent). Among the well-heeled in Asia-Pacific, art’s share of their passion dollar was 13 per cent.
The most frequently quoted indicator of art’s investment returns is the Mei Moses Fine Art Index. Its index for all art for 2007 rose 20 per cent, a performance only surpassed by some of the annual returns achieved in the art bubble years of 1984 to 1990, it says on its website. This dramatically outpaced the 5.5 per cent achieved by the S&P 500 total return index. It was, however, outpaced by gold which rose over 30 per cent.
In the most recent five and 10 year periods, art trumped stocks, according to the index. Art returned 16.2 and 10.3 per cent per annum in the respective time periods, compared with stocks’ returns of 12.7 and 5.9 per cent, respectively.
1985 to 1990 art index up 30% per year then shed 65% 1990 to 1995
Yet art, too, has its boom and bust cycles, as Michael Moses, the creator of the index, told Reuters earlier this year. From 1985 to 1990, Western contemporary art values rose at an annual compound rate of 30 per cent, before shedding 65 per cent in the next five years, he said.
Now, one of the most frequently raised questions is whether there is a bubble in contemporary art, particularly by Chinese artists. Ms Gyorgy says: ‘In this economic climate, the portion of the emerging art market that has recently experienced huge jumps in value on the high end are poised to experience the greatest price correction.’
Only some artists survive a pricked bubble
She says that a similar spike in value and dramatic correction occurred in the 1980s and early 1990s for many ‘newly minted art stars’. ‘With the passing of time, a number of the 1980s artists have regained their value and place in the art market, and some have not survived the test of time. I expect we will see art market history repeating itself.’
Citi advises clients to do their homework, talk to experts and collectors, and to research great collections. Buyers should also learn how to evaluate the condition of art works, visit auctions and learn how to negotiate with private dealers.
New art fund launched to focus on emerging art markets
Art funds are also an option. Meridien Art Partners is working with Calamander Capital to launch the Emerging Art Market to invest in contemporary art, scouring the markets of South-east Asia, Vietnam, Russia and the Middle East. The fund has so far raised about US$10 million and the partners will be gearing up to market the fund to European, Russian and Middle Eastern clients as well.
Ultimately, you must love the piece that you buy. As Citi says in its art advisory material: ‘We do not recommend that clients buy art purely for investment. . . There are many other investment vehicles that give higher or more predictable returns than art.
‘The art market is a fickle place, but art can be a good investment if you take a long-term strategy, do your homework and are well advised.’
This article was first published in The Business Times on October 18, 2008