This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Nov 30 – Dec 6, 2015.

According to Citigroup’s data, art as an asset class has underperformed equities but outperformed bonds over the past 100 years. But the global art market is poised for a slowdown after seeing stellar growth since 2000. How will this impact investors?

THE GLOBAL art market has grown rapidly since 2000, at an average of 13% a year, driven mainly by the entry of China. Total sales reached US$3 billion (RM12.9 billion) while auction turnover hit US$16.1 billion last year.

Citigroup Inc says in its latest Global Perspectives and Solutions (Citi GPS) report that the last several years have seen nosebleed prices for works of art. Auction records seem to be broken almost as soon as they are made. But the vogue has almost reached an equilibrium, according to the 60-page report.

The report acknowledges that art as an asset class has been coveted by individuals with well-diversified portfolios for decades, albeit the complex and subjective nature of their investment. Like other alternative investments, art sales are pegged to macroeconomic volatility, says the report. 

“Looking at more than 100 years of data, art has underperformed equities but outperformed bonds. Over time, there is a clear link between art prices and the global economy,” says Citi’s global head of research Andrew Pitt.

Citing significant events in history, Pitt points out that art prices plunged the most during World War I, the Great Depression, the 1973 oil crisis, the early 1990s and, more recently, the 2008 global financial crisis. The economic slowdown in China is also a factor, notes the report. 

Will the robust growth of the 2000s continue? The experts at Citi do not think so. There will be growth, but it will not be the stellar trajectory seen over the last two decades. 

“A different adjective is in order — ‘solid’ instead of ‘stellar’ growth, ‘balanced’ not ‘burgeoning’, and so on,” says JP Morgan Asset Management’s multi-asset solutions group executive director Benjamin Mandel, one of eight authors of the report.

“The reason for the downgrade is that the sources of growth in the market since 2000 may not prove as durable as many observers believe. Rather, the narrative that emerges from the performance of the market since 2000 is one of structural one-offs that have given rise to considerable — though ultimately temporary — support for the market’s trajectory,” he says.

The structural one-offs irrefutably refer to China’s forceful entry into the global art scene. Accounting for more than a quarter of total sales, the market is second only to the US, states the report.

“This assertion is based on the various dimensions of the Chinese market having largely converged to similar measures for the US and the UK, its direct comparables in terms of market share. In some instances, specifically regarding the quantities of lots and artists, China has run out far ahead of the US and the UK,” says Mandel.

“This actually suggests a market that is overheating relative to its equilibrium size, not one that is in the process of catching up. On the other hand, in some dimensions, the growth of Chinese art still lags, suggesting further scope for broadening out and some incremental structural growth.”

Citi says more than half the auction sales in 2000 took place in the US, while a quarter of them were in the UK. France, the third largest market, accounted for just over 5%.

Fourteen years later, seven of the leading markets in 2000 are still in the top 10. But there is a stark difference — China rocketed to No 2 in the global art market last year, with more than a quarter of global sales, worth US$4.4 billion, taking place in the country.

“Compared with the US/UK duopoly in 2000, which presided over 80% of auction sales, the US/UK/China triad now accounts for 85%. Moreover, the ascent of China has radiated widely throughout the global market. Seventeen of the 29 countries where auction sales took place in 2000 experienced a decline in market share in the wake of China’s rapid ascent,” says Mandel.

He explains that the development of the Chinese market has been characterised by explosive growth in the quantity of art sold, which he says is a common feature of the early stages of art market development. “As the market matures — and there is evidence to suggest that China has reached close to its ‘equilibrium’ size in the world market — the growth in quantities will moderate, removing what has been a large tailwind to global growth.”

Mandel asserts that the Chinese art market “will not be a one-way bet through 2030”. Although the Chinese market has caught up with the US and the UK, there is the risk of either a disorderly slowing, unwinding or broader credit bubble popping. He recommends caution on the part of prospective investors.

“Consistent with our observation that China went from a very small contributor to global growth pre-2000 to a very large one, sales per auction house in China grew blisteringly fast — 19% compound annual growth between 2000 and 2014. That growth rate is a multiple of comparable rates in mature markets, where sales per auction house were in the single digits,” he says.

Mandel notes that the massive proliferation in sales was due to an explosive growth in quantities in several areas. “The number of artists per nationality rose at a staggering rate of 17% per year, while the number of lots per artist and the number of artist nationalities per category grew at 8% each. Quantities sold were also propelled by the explosion in the number of auction houses — from one dominant house to 66 — which caused categories per auction house to fall at a rate of 18% per year.

“China’s extraordinary period of catch-up growth has largely played out, while the inequality in auction prices may reach some natural limit. As a result, the slowing of these factors could subtract up to a third from the annual growth of the global market, that is, global growth would be on the order of 9% rather than 13%.

“The US and UK markets, in turn, have been boosted by a steady stream of record auction results, driven in part by widening global inequality. While it is difficult to predict when this trend will end, it is worth noting that the US and UK will be far more exposed to the fallout than other mature markets such as France and Germany.”

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