The strong art market recovery seems to have been well on track since 2010. Auction prices are setting new records (artists such as Edvard Munch, Roy Lichtenstein, Franz Kline set new records in 2012), auction houses are posting outstanding revenue growth and art fairs are flooded with hungry collectors. Recent London Post-war and Contemporary sales surpassed the levels from the previous boom in 2008, propelled by the very high-end of the art market. The only doubt remaining at this stage is the global economy’s health and the equity market’s near term performance.
There is no doubt that we are witnessing transformation at the top end of the art market with new players bringing wealth from emerging economies, increasing interest in art investment.
An unusually low interest rate environment, equity markets volatility and expensive government bonds make the search for diversification in the financial world a crucial goal. Art could play the role of portfolio diversifier, as well as that of shelter, such as gold is.
On top of this, art as a financial instrument is likely to play a role in the race to hedge possible rampant inflation that could result from on-going hyper-accommodative monetary policy. Investors are also comforted by low correlation with other asset classes and the ability to park their money in real assets.
With the wide acceptance and recognition of art as viable alternative investment, one has to emphasize the difference from traditional asset classes, such as equities or bonds: the first being that artworks are illiquid assets with high transaction costs. For these reasons, art qualifies best as a long-term investment and the non-financial dividend should be a key motivator behind any art investment.
Two trends are likely to materialize in the short to medium term. Firstly, the Latin American art is poised to grow. Fuelled by economic growth and wealth creation, coupled with a ‘state of the art’ art market infrastructure (the Gagosian installation in Rio and the White Cube in Sao Paulo) and increasing collector base, the Latin American art market is likely to provide decent returns this year.
Secondly, the contemporary art market will witness some kind of discrimination (artists such as Damien Hirst are likely to be discreet this year) and might lose part of the momentum acquired over the past 3 years in profit of blue-chip Modern Art.
Finally, public auctions will be focusing even more on works that are commercial, exceptional and fresh to the market. It might be a difficult year for tier-two artists with weaker reputations and, in the short term, it is safer to buy an artist with a broad market and sustained demand.
We can safely assume that as a result of growing global wealth (especially in Asia) and the emergence of new private and institutional buyers, demand for art should continue to rise in 2013.
The writer is Head of Investment, Liechtensteinische Landesbank, Dubai.