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Art market jitters over financial turmoil

Nervous investors have rushed to safety in gold and the Swiss franc but art looks more volatile

Who's worried? A trader on the floor of the New York Stock Exchange, 18 August

Fears are growing about the potential impact of this summer’s renewed global economic turmoil on the art market. The 2008 financial crisis sharply hit art sales across all sectors, but the market bounced back quicker than many others, particularly for blue-chip works. At issue now are two ­diverging premises: that art is a luxury brand, as sensitive to stock markets as high-end fashion and first-class flights (this is the view of those looking at the art market from the outside); or that it represents a safe investment, sought after in troubled times much like gold and the Swiss franc (the view of those with more vested interests).

Dark clouds

Since art market professionals went on their summer break, the widening European sovereign debt crises and Standard & Poor’s downgraded opinion of the US debt triggered fears of a “double dip” recession, which saw stock markets fall worldwide.

The wealthy, especially in cities such as London and New York which rely heavily on their ­financial centres, all now have less to spend. The hedge fund SAC Capital, run by the art collector Steve Cohen, was down 4% for the first week of August alone.

In the luxury goods sector in Europe, share prices are down ­between 15% and 30%. “We see significant potential downside if the crisis mimics 2008,” said Julian Easthope, a research analyst at Barclays Capital in London. He looks closely at stocks, including France’s PPR, founded by Christie’s owner François Pinault.

Sotheby’s stock has certainly felt the pinch: since 7 July, it has lost 37% of its value (falling from $47.8 to under $30, as we went to press), wiping over $1.2 billion off the value of the company. This reduces the money available to it at a time when competition with Christie’s is already eating into its profits. In the fight for the best works, both auction houses need to offer increasingly attractive terms to consignors, which is reducing Sotheby’s profit ­margins (see p59).

Safe as houses?

Others say that some of the lessons learned since the 2008 ­financial crisis are reasons to be more confident in the art market. “There was much more of a shock when the banks started collapsing. Then the [art] market reconfigured as the rain washed out some of the speculators and short-term engagers,” said art advisor Allan Schwartzman. “What has been validated in the last few rounds of uncertainty is that art is a genuine form of capital,” he added, comparing it to traditionally safer investments such as gold. This, he said, is reinforced by the near-zero interest rates in the US.

In a reaction to the financial crises, gold has hit a new record price, nearing $1,830 an ounce as we went to press, with silver and other precious metals up in concert. The Swiss franc, seen as one of the most reliable currencies, reached an exchange rate high of $1.28 and nearly equalled the ­euro for the first time.

All agree, however, that one key factor underpinning the ­potential health of the art market is whether or not the emerging economies, such as China, could pick up any slack should the more traditional markets falter.

Bets on China

The major commercial players are certainly banking on the potential: Sotheby’s chief executive Bill Ruprecht said on the auction house’s most recent conference call to Wall Street analysts that it was cutting back investment in Europe in favour of initiatives in China (see p59). White Cube has become the latest big-name western gallery to open in Hong Kong, its first overseas venture.

But on 9 August, the day after stock markets in Europe and the US collapsed, Hong Kong’s Hang Seng index fell nearly 6% with other Asian stocks (most notably in South Korea). Many economic commentators are also concerned about China’s unsustainable trade surplus. “If there is a market dislocation as in 2008, even sectors of the art economy driven by relatively healthy economies such as China and Brazil could be impacted. But the emphasis is on the severity of a downturn,” said Artvest’s Michael Plummer.

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