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THANK YOU to all of you who sent us positive and supportive reviews subsequent to our last newsletter. To keep our newsletter as interesting as possible, we decided to switch to a monthly publication, unless we have some compelling news to share in the meantime.

◊  Inflationary pressures, gold-like store holds of wealth and potential higher taxes: blue-chip art poised to perform well

The top auction houses are gearing up for the new year with optimism, with a number of rare and blue-chip works coming up for auction in the second half of March.
In the meantime, inflation expectations are breaking upwards (in tandem with stock markets). In the US, 10-year inflation expectations are at their highest since 2014. According to various market observers, rising inflation is rather a symptom of growth at this stage. But as the FED is expected to allow inflation to run to levels above 2% for while, alternative investments, like the bitcoin, flourish.

Historically, art performance has been the strongest during periods of above-average GDP growth and inflation, but has also provided a good protection against inflationary outcomes in low growth periods.

                
Thus art, as it constitutes a claim on real assets, offers a partial hedge against inflationary pressures that might be building up.

Another aspect to keep track of, is the ballooning government debt, in a context of ongoing monetary creation. This emphasizes even further the need for gold-like storeholds of wealth assets at the portfolio level; hard assets that can be held privately.

Increased levels of government debt also means that we need to prepare for a time when higher taxes - capital gains, wealth and income - will effectively constrain capital accumulation, as explained by Jonathan Ruffer in his latest review. In several jurisdictions, such as in France, we have already seen (U)HNWIs allocate a higher portion of their wealth to art in anticipation of rising taxes (as art does not incur any wealth taxes despite successive political debates since 1980).

These economic realities should benefit the art market going forward, in particular the high-end. A more granular view of the different art segments is nevertheless essential and price behaviors are expected to vary.
Indeed, sentiment in "red-chip" artists segment seems to become jittery. Shooting stars and emerging artists have experienced an acquisition frenzy (particularly in the second half of 2020), that will probably not be sustainable and that has already prompted uneasiness with market experts, as highlighted by the latest report issued by ArtTactic.
Their report shows that some concern is building up for young contemporary art, especially in the $50,000 to $100,000 price range. On the contrary, negative anticipations remain very limited in regards to the blue-chip contemporary market and the post-war segment.

                                    

                                Source: Financial Times, ArtTactic Art Market Expert Survey, Jan 2021 @FT

https://on.ft.com/3tUa7cV

◊  Brexit update: import duties between Europe and the UK

Under the Brexit agreement, exports between Europe and the UK are zero-rated (subject to proof of export), which means invoices are VAT-free. But EU collectors purchasing works of art in the UK and shipping them to their home country will incur an import duty at their country’s import VAT rate.

As a reminder, here’s a chart of some of Europe’s import duty rates:
  
                                   

                                                                             Source: Charles Russell Speechleys

Germany, to be on par with France, has temporarily reduced their import rate from 7% to 5.5%.

VAT Margin Scheme lost on cross-border transactions
Furthermore, secondary dealing transactions that involve cross-border payments between the EU and UK will become more expensive for the art trade! 
Indeed the VAT Margin Scheme benefit will be lost for those transactions.  (The VAT Margin Scheme only requires VAT to be accounted for on the profit margin of qualifying second-hand goods (including works of art, certain collectables and antiquities over 100 years old), rather than on the full sales price).

More details on Temporary Admissions, Cultural Property repatriation, copyright and IP in this excellent note:
https://www.charlesrussellspeechlys.com/en/news-and-insights/insights/private-wealth/2021/brexit-deal-impact-on-the-uk-art-and-luxury-market/


◊ ESG in the art world: in search of the S

Major Museums have started to address the diversity gaps in their collections over the recent years, in reaction to increased scrutiny of white male dominated collections, heightened by the Black Live movement. Several high-profile announcements reflect the progress done: The Metropolitan Museum of Art in NY announced in 2020 a $10 million endowment for works by BIPOC (Black, Indigenous and People of Color) artists, while the Baltimore Museum famously sold off a group of white male artists and spent $2.57 million last year on 65 works by 49 female-identifying artists (of which 40 had not been previously represented in the museum).

These acquisitions have now been partly hampered by a covid-induced financial crisis for cultural institutions, but at the same time, museums are also being pushed to rethink their whole internal organization, by staffing up more diverse expertise (hiring curators from a more diverse background) and rewriting the narratives of their exhibitions. Such organizational changes should trigger more deep-rooted diversity, that transcends mere gap filling.

The art world has indeed only recently acknowledged the richness and variety of art production, as described in the absorbing documentary directed by Sam Pollard 'Black Art: 'In the Absence of Light' and released by HBO.
The documentary highlights how Black artists had always done distinctive work in parallel to, and some within, a white-dominated mainstream that ignored them. The NY Times' review is worth a read:

https://www.nytimes.com/2021/02/08/arts/design/black-art-hbo-review.html
https://news.artnet.com/art-world/art-museum-diversity-collections-1942997


More to follow next month !

The LINK Management team 

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