The value of art during volatility: the value of opportunity

“THE ART MARKET IS BEATING THE STOCK MARKET”

FORBES, MARCH 27, 2020

“THE TWO GREATEST STORES OF WEALTH INTERNATIONALLY TODAY [ARE] CONTEMPORARY ART … AND I DON’T MEAN THAT AS A JOKE, I MEAN THAT AS A SERIOUS ASSET CLASS. AND TWO, […] APARTMENTS IN MANHATTAN, VANCOUVER AND LONDON”[i]

LARRY FINK, CEO OF BLACKROCK

“OUR STUDY FINDS STRONG EVIDENCE OF SUPERIOR PERFORMANCE OF ALL ART COLLECTING CATEGORIES DURING RECESSIONS AND PERIODS OF LONG ARMED CONFLICT”[ii]

“ART PROVIDES GOOD DIVERSIFICATION BENEFITS DUE TO THE FACT THAT IT IS NOT PERFECTLY CORRELATED WITH STOCK MARKET MOVEMENT DURING PERIODS OF MARKET STRESS”[iii]

NYU STERN SCHOOL OF BUSINESS PROFESSORS MEI JIANPIN (PHD) AND MICHAEL MOSES (PHD)

Jeff Koons’s Rabbit sold for $91 million in 2019; most expensive work by a living artist.

Stefan Edlis, the previous owner, bought it for $945.000 in 1991. The art world thought he was crazy then.

©2019 Cristóbal Galicia Art Advisory

The S & L crisis and the burst of Japan’s asset price bubble in the early 90s brought the art market to a recession from 1991 to 1995. This came in the form of the withdrawal of sellers, rather than the absence of buyers, in fear of lack of demand after the complete disappearance of Japanese buyers, known as the hyper inflationary force of the 80s market[iv]. Confidence was slowly recuperated, and by 1995[v] the art market was back on track as the US was starting its new expansionist cycle and a new cluster of Chinese buyers emerged, along others from emerging economies, in what was becoming a global art market. During the 2008-2009 contraction, top-end buyers remained, and supply was again affected in the same way as in the 90s, although this time the market was carefully “edited and managed” to meet demand in 2010 and 2011. Low interests’ rates and HNWI’s acknowledgment of art’s hedge value, were the other factors that fueled the quick recovery. In any case, it is important to note that in spite of art buyers cash reserves during recessions, they tend to buy when others are, as a moral code of conduct; they do not feel right buying while others are made redundant and businesses are going bankrupt[vi].

The coronavirus outbreak has confined around 3.9 billion leading to an unprecedented sudden stop of the global economy with still unknown financial and economic ramifications. What we do know is that the art market’s general performance correlates to global wealth indicators such as global GDP[vii] rather than financial markets[viii]. But, historically, the art market’s “correction” in times of crisis comes from a large portion of sellers holding high quality artworks, as seen previously, until better times come, while the few HNW population in distress bring some of their works to public auction in search for immediate cash. In this current scenario, and looking at 2019’s performance, we could expect the art market’s value to contract as the supply of high-quality art diminishes[ix], as it previously happened in 1991-1995 and 2008-2009. However, there are signs that this crisis may bring better opportunities from the supply side as top works from blue-chip artists such as Pablo Picasso, Gerhard Richter and Roy Lichtenstein are coming to the market at 35% discount of what they would have fetched at the two big evening auction houses in London this past February[x]. This, along with art buyers’ behavioral approach to diminish acquisitions during crises, will largely eliminate competition providing a unique opportunity, and perhaps the best in the last 20 years, to buy the best artworks from the best Contemporary artists at a considerable discount.

The question is to determine the length of the art market’s contraction; historically, contractions have lasted from 2 to 4 years (although 3 and 4 years are the exception), after which the art market attained pre-crisis figures within a very short period. In 2009, after the sharp decline to a low point of $39.5 billion, the market pushed back to just under $65 billion by 2011, which then pushed up to $68.2 billion by 2014, a historic high[xi]. Mei and Moses, professors at NYU Stern Business School and developers of the famous Mei Moses Art Index[xii], recently bought by Sotheby’s, pointed that after “using Business Cycles dates from the National Bureau of Economic Research and the Mei/Moses Art index, we have found several interesting price patterns. First, while there tends to be a flight to safety away from the art market, producing a decline in art prices, the impact of recessions tends to be short-term. While several recessions did cause large price declines, such as those in 1973-75 and 1990-91, the declines did not happen until the second year of the recession and they were followed by robust recovery after the recession.”[xiii]

Art is a highly illiquid asset class, but its rarity, uniqueness and universal timeless attraction to HNW individuals and institutions worldwide makes it the perfect inflation-adjusted tangible tool where to store wealth safely during periods of high volatility.

[i]Udland, M., 2015. LARRY FINK: Contemporary Art And Luxury Apartments Are The New Gold. [online] Business Insider. Available at: <https://www.businessinsider.com/larry-fink-on-stores-of-value-2015-4> [Accessed 29 March 2020].

[ii]Mei, J. and Moses, M., 2002. Economic Activity And Painting Performance. New York: Stern School of Business, p. 22.

[iii]Mei, J. and Moses, M., 2002. Economic Activity And Painting Performance. New York: Stern School of Business, p. 13.

[iv]McAndrew, C. 2012. The International Art Market In 2011. 1st ed. Helvoirt: The European Fine Art Foundation (TEFAF), p. 84.

[v]Mc Andrew, C., 2012. The International Art Market In 2011. 1st ed. Helvoirt: The European Fine Art Foundation (TEFAF), pp.132, 133.

[vi]Mc Andrew, C., 2012. The International Art Market In 2011. 1st ed. Helvoirt: The European Fine Art Foundation (TEFAF), pp.132, 133.

[vii]Donovan, P. (Chief Economist, Global Wealth Management UBS) (2020). The Art Market 2020. Zurich/Basel: UBS/Art Basel, p. 15.

[viii]McAndrew, C. (2018). The Art Market 2018. Zurich/Basel: UBS/Art Basel, p. 265

[ix]Donovan, P. (Chief Economist, Global Wealth Management UBS) (2020). The Art Market 2020. Zurich/Basel: UBS/Art Basel, p. 15.

[x]Kazakina, K. and Weiss, M., 2020. Gundlach Fields ‘Panic Offers’ With Art Market In Distress. [online] Bloomberg.com. Available at: <https://www.bloomberg.com/news/articles/2020-03-20/gundlach-sees-distress-in-art-market-that-sotheby-s-debt-shows> [Accessed 29 March 2020].

[xi]McAndrew, C. (2020). The Art Market 2020. Zurich/Basel: UBS/Art Basel, p. 30.

[xii]https://www.sothebys.com/en/the-sothebys-mei-moses-indices

[xiii]Mei, J. and Moses, M., 2002. Economic Activity And Painting Performance. New York: Stern School of Business, pp.9-13.