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Inside Out: How art can get you through inflation, market crashes and bellwether auctions
By Andrew Bay, UK
Most stock market investors wouldn't think of buying paintings by Rubens or Fernand Leger to mitigate the impact of inflation on their portfolios. Unlike gold, which is the de facto preferred "go-to" asset for most high finance professionals, fine art is usually perceived as being too volatile or idiosyncratic to be considered as a reliable investment. On closer inspection however, for the astute investor, the long term value of great works of art is certainly worth taking into consideration.
A growing number of trading analysts seem to concur that the value of art outperformed the value of gold in the US, during the last period of critical rise of inflation. With an average inflation rate of 10% from 1970 to 1980 in the US, the annual growth of the value of gold was around 30%, while growth in the art market averaged 35%. More recent statistics clearly confirm that the trend is still ongoing.
A recent study published by a leading UK market index showed that from 2000 to 2022, the annual growth in revenue in the art market was just over 11%, while the stock market averaged annual growth of only 4%. Real estate and bonds values have plunged into deep instability, most S&P stocks* are in trouble, stablecoins** are seldom very stable, and it's best to approach traditional cryptography with the utmost care.
Art markets, on the other hand, are alive and well — and it’s worth asking why. It is true that for the longest time, the art world had been engulfed in the mystery of stifling auctions, unpredictable market trends, and restricted access to information. But the industry at large is starting to change, and a greater number of institutions are granting access to their coveted portfolios to the public, and increasing potential gains for a larger number of investors, as a consequence. Art is capable of resisting inflationary pressures because in most cases, it remains sheltered from the unpredictability which is characteristic of the majority of financial environments.
Investments portfolios built in markets such as raw materials and real estate, are more susceptible to be affected by the frequent downward trends which characterise our modern networked economies. By contrast, business studies show that the value of works of art remains relatively immune from these unpredictable peaks and troughs. This is the long term edge provided by an investment in art, as a general rule. To put it more succinctly, the woks of a great master truly constitute a unique category of assets.
It must be said however that, although average yearly return on investment rates may seem high in the long run, there are also considerable market fluctuations to be accounted for, year after year. This is especially the case in contemporary art, where market deviations can soar as high as 30% from year to year. These fluctuations in prices could be excessive for some investors. They also point to another category of assets which is as unpredictable as it is exciting.
Classical masterpieces are increasingly being dislodged from the pantheon of the art world by the rapid rise of Non-Fungible Tokens (NFTs), and it is true that there are many similarities indeed, between these two assets. It certainly looks like in the near future, galleries and curators will be trying to create platforms very similar to the NFT ecosystem, which will also incorporate more conventional works of art. This will attract a broader spectrum of investors and buyers, merging the NFT crowd with seasoned art collectors; art world veterans with decades of experience in the industry, will co-exist with Gen Y and Z tech-natives, who are also passionate about the arts. Eventually, an increasing number of multi-media platforms will be investing in top-notch, "in the flesh" works of art, while NFTs will remain by nature, mostly digital.
It seems increasingly apparent that a savvy investor should seek the right vehicle to hedge his bets against the instability of the financial markets, the slowdown in cryptocurrencies, record high inflation and geopolitical crises. And investing in the arts, may indeed prove to be a sound decision.
The year 2022 confirmed what history has proven time and time again: sound art investments can create a bullet-proof portfolio, which will generate stronger return margins than the S&P 500 over the last 20 years. From January to July 2022, major auction houses In New York and London reported record sales exceeding $ 4billion. These exceptional figures confirm the increasing prominence of the art world in our globalised economy.
Market analysts reports suggest that since July 2022, the modern art markets have performed an average 15% return against 8.9% for S&P 500 companies on the stock market.
Overall, art works still remain a highly valued asset in spite of the unfavorable financial market conditions.
Although there aren't many investment strategies that can provide a consistent buffer against inflation policies, art in most instances, is demonstrably one of them. It remains a favourite choice along with real estate, for experienced investors, as opposed to bonds and stocks.
Moreover, new products such as split investments, can enable individual asset holders to manage their art portfolios just like a stock holder would. Diversification is the fundamental concept on which a thriving, long term art investment fund rests. It has the potential to reduce unnecessary losses, through the acquisition of works by artists from different eras, styles and reputation, in public and private markets. Portfolio diversification simply is the essence of any investment philosophy, and therefore equally applies to investment in art. The works in themselves and the public's taste can change and evolve, and the markets will invariably respond to these unknown variables.
The central idea however remains the same: if an artist or a particular genre's market is outdated, you are fully at risk to suffer the consequences of that depreciation. Therefore expert art collectors purchase works from a range of different artists and eras. It is therefore of the utmost important to concentrate one's acquisition strategy on artists who have compelling market value and career paths. This applies especially for artists whose reputation is growing or consolidating. In their case, the support of major galleries and curators is crucial, to gain momentum and keep the future of these markets strong.
The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on exchanges in the United States. It is one of the most commonly followed equity indices.
Stablecoins are cryptocurrencies where the price is designed to be pegged to a reference asset. The reference asset may be fiat money, exchange-traded commodities, or a cryptocurrency.