We all know by looking at the economic data that we’ve just come out of an economic recession. The unemployment rate is up, GDP growth is down, and the world economy doesn’t seem to be able to recover. In this market, what area has been doing very well? The high-end art market.
We’ve seen record prices attained for high-end artwork over the last few months. The reason is that even the wealthy are worried about the stock market and their market sentiment is to buy tangible things, like art and gold. This investment strategy also benefits with inflation, as art will appreciate at a rate equal to or higher than inflation. A sign of wealthy individuals with such an investment strategy should alert everyone else that they too should fear the possibilities of inflation blowing in the wind.
When compared to the S&P 500 index, the art market beat the index, returning 11% in 2011, from data compiled by the Mei Moses All Art Index. Over the last decade, this art index has beaten the S&P 500 60% of the time, exceeding the average by 7.8%.
While the art market was hit by the initial fall in all of the markets in 2008, it has bounced back very strong. The wealthy realized they wanted to diversify their investment strategy. They looked for hard assets that would go up with inflation and they looked to places like art and gold. I would agree with this market sentiment; one needs to be prepared for the coming rise in inflation. While precious metals and gold are great hedges, there are other ways to take advantage of this market sentiment.
I wouldn’t recommend the investment strategy of directly buying high-end artwork. For the average investor, it is far too difficult and costly to enter the market and diversify their portfolio. However, an interesting avenue might be to make money off each transaction through auction house Sotheby’s (NYSE/BID).
Sotheby’s was established in 1766 and has expanded all over the world, being one of two leaders in the market for high-end art. The firm has a profit margin of approximately 23%, but more importantly it gives the investor the ability to take part of a diversified investment strategy when the price of assets goes up.
I’m not the only one who has noticed that art prices have been strong performers even in this bad economy, as several hedge funds have been set up with this very same investment strategy. A report by Deloitte Luxembourg and ArtTactic showed that, in 2011, the assets in investment funds in art went up 26% from 2010 to a total of $960 million. Sales at both of the major art auction houses, Sotheby’s and Christie’s, were also strong last year, totaling $1.7 billion in 2011, up 35% from 2010.
Some of the most expensive works of art are now by Chinese artists. As Chinese wealth continues to soar, the rich there are putting their money into unique investments. The growth of the Chinese market is here to stay; as the number of millionaires and billionaires grows, so will their appetite for art as an investment strategy.
The place where these wealthy individuals and hedge funds buy their artwork for this investment strategy is at one of the major auction houses, including Sotheby’s. Of course, it’s impossible to know if this market sentiment will continue. What we do know is that there will be more Chinese wealthy patrons 10 years from now and we know that the central banks are about to start printing money at a very fast pace.
With this combination of a whole new group of clients and inflation about to soar, it would seem that being the middle-man as an auction house might be a really good option.