2 August, 2022

With financial markets currently in turmoil and inflation biting ever so strongly, many advisors are turning to art as an alternative asset class to further diversify their clients’ portfolios. For a long time, art has been an attractive investment option, due to its low correlation with the equities market, and its risk-to-reward ratio. In this article, we explore how rising inflation and interest rates could be allies of the art market.

In January 2022, prices increased by 5.5% in the UK, 7.5% in the US and 5.1% in the EU, compared to the previous year (‘Inflation & Interest Rates: Art Market Allies or Enemies?’). These have continued to rise, largely due to surging energy costs made worse by the Ukraine issue, and supply chain disruptions. As a consequence, central banks are under increasing pressure to tighten monetary policies, applying higher interest rates. And yet, while inflation reaches an all-time high and stocks tumble, the art market has seen a total of $5.7 billion in sales so far this year (‘Art as a Hedge Against Inflation’). It appears to be favoured by high net worth individuals as a way of preserving their capital during periods of economic instability.

Indeed, art is believed to be a ‘safe haven asset’, known to have traditionally performed strongly during times of high inflation, according to Madelaine D’Angleo, CEO of Arthena, a technology firm that creates Machine Learning (ML) based solutions for the art market (as quoted in ‘Inflation & Interest Rates: Art Market Allies or Enemies?’). Like gold, artworks are less susceptible to risks associated with financial market crashes than stocks and bonds. Because of its intrinsic value as a luxury item, art is able to rebound and grow faster than traditional asset classes in response to economic crises. 

Additionally, according to the Art Basel and UBS Global Art Market Report 2021, engagement in the art market remained active during the Covid-19 pandemic, with 66% of those surveyed reporting that the pandemic had increased their interest in collecting, including 32% who reported they had significantly done so. In 2020, the most challenging year in the art market’s contemporary history, global sales of art and antiques also reached an estimated $50.1 billion, down only 22% from 2019, showing a considerable increase in the value of many recognised artists.

In particular, this robust dynamic was demonstrated during the financial crash of 2008. The Artnet index for the Top 100 Artists bounced back and even outperformed its 2008 peak within two years of the drop, whereas the S&P 500 took five years to recover, only regaining its strengths by 2013. These data demonstrate the capability of artworks by Blue-chip artists, or high-value artists widely recognised by the market, such as Boetti and Chagall, whose positions have been consolidated by exceptional sales volumes over the course of several years to retain value during economic downturns. 

Moreover, focusing on the return of art investments over varying time periods, it is possible to note a positive compound annual growth rate (CAGR) in the long run across all art price indices. As shown in the Deloitte Art & Finance 2021 report, the Artnet art market indices showed positive CAGR across numerous collecting categories between 2019 and 2021. Global Contemporary Art is among the categories generating the most consistent returns over the past 15 years, with a positive CAGR across all investment cycles. More specifically, focusing on the performance of art as an asset class, the Artnet Index for the Top 100 Artists displays a considerable positive return over time, outpacing the S&P 500 in growth consistently. Indeed, Artnet’s index for the Top 100 Artists produced an 8% compound annual growth rate (CAGR) between 2000 and 2018, compared to 3% for the S&P 500, as reported in the Deloitte Art & Finance 2019 report. In this sense, the Artnet Index for the Top 100 Artists, comprising Blue-Chip artists, is a strong proof of the strength of the market at a general time. 

Just like stocks and bonds, art can increase in value, though, due to the illiquidity of art, a long-term hold is crucial for a potentially larger return on art investments. For those unable to acquire an entire artwork, but still looking to invest in art, fractional ownership represents an efficient solution to democratise the art market and has shown to be one of the biggest upcoming trends. According to the Deloitte Art Finance Report 2021, 29% of wealth managers said that their clients had expressed an increased interest in fractional ownership. Briefly, through the model of fractional ownership, investors can securely purchase a percentage of a high-value artwork, vetted by experts for authenticity, in the form of art shares, becoming co-owners of that artwork and creating a portfolio of shares by different artists. It offers them the possibility to invest in the art market, just as they would the stock market. 

To conclude, in times of economic turmoil, many have chosen to invest in art as an effective way to preserve their capital and diversify their portfolios. That said, it is always important to speak to experts and carry out the necessary due diligence before investing in any artwork or artist. Blue-chip or high-value art is usually seen as more secure by investors, as it has proven high demand from art buyers. Similarly, fractional ownership represents an effective solution for those looking to invest in art at lower price points, while still building robust and diverse portfolios. Overall, investors are largely advised to never put all their ‘eggs in one basket’, in order to navigate times of crisis as steadily as possible. Art has the potential to be a strong addition to any investment portfolio.

If you would like to learn more about art as an alternative asset class or how fractional ownership could benefit you, then please feel free to contact us.

Sources:

Art Basel and UBS Global Art Market Repor 2021, https://artbasel.com/stories/art-market-report-2021

Deloitte, Art & Finance Report 2019, 6th Edition, https://www2.deloitte.com/content/dam/Deloitte/ch/Documents/privatemarket/deloitte-ch-private-art-and-finance-report-2019.pdf

Deloitte, Art & Finance Report 2021, 7th Edition, https://www2.deloitte.com/lu/en/pages/art-finance/articles/art-finance-report.html

Jenny Muñoz, ‘Art as a Hedge Against Inflation’, Nomad Salon, Jul 2022, https://www.thenomadsalon.com/post/art-as-a-hedge-against-inflation

Mireia Carbonell, ‘Inflation & Interest Rates: Art Market Allies or Enemies?’, Made in Bed, Mar 2022, https://www.madeinbed.co.uk/art-business-markets/inflation-and-interest-rates-art-market-allies-or-enemies