◊ Sitting duck or stabilizing force: the art market in times of turbulence

The beginning of the year has been rocky for financial markets; increased and more permanent volatility, the return of inflation in public consciousness, geopolitical uncertainty and a paradigm shift in central bank policies nicely concurred to rattle candid optimism.
But so far, it doesn’t appear like the risk-off sentiment has spilled into the art market.
Art Tactic has just released their survey of 129 art market insiders, realized earlier this year, to measure the general sentiment concerning art market trends in 2022. Responses turned out largely optimistic: 47% of the surveyed experts predict an improvement of the art market in the next six months, 42% believe the market will consolidate around these levels and 11% anticipate the market to decline in the next 12 months.

@Art Tactic:

Nevertheless, it feels like this year contradicting forces will be tugging at each other in the art market.
Art, like other alternative classes, has benefited from the low interest rate environment, as the opportunity cost of owning art decreased. Rising interest rates should thus have a somewhat negative impact on capital inflows into the art market.
But simultaneously, inflation might turn out far more sticky and difficult to curb. From an historical point of view, it appears that inflation has acted as a driver for art in the past (Citi  studied a blue-chip portfolio based on the price-weighted Masterworks. io index, that showed an annualized return after inflation of around 10% per year in the 1970s). Granted there is a lack of tested empirical data that measures the correlation of art with inflation, general observations suggest that the price of art (sold at auction) increases in times of inflation.

Thus, rather than focusing solely on interest rates and their impact on the art market, we believe that it’s important to monitor real rates, which should remain negative in the medium-term and at multi-year lows. Ongoing negative interest rates would indeed uphold the art market.

Another well discussed subject in times of turbulence is the diversification potential of art in overall asset allocations.
Historical data suggests that art has exhibited low correlations in the past with other asset classes (period considered is 1985 to 2020), as shown here below in a study undertaken by Citi Private Bank.

Source: Citi GPS: Global Perspectives & Solutions, December 2020

These relatively low correlation levels with other classes suggest that art can indeed add a stabilizing factor in overall asset allocations.
But here again, some caution is warranted. First of all, all art indexes are imperfect and skewed by the survivor bias. Secondly the art market is constituted by a number of sub-markets, most of which are driven by diverging price behavior and evolution.
The blue-chip end of the market (which spans on all art periods) has become a market with its own risk characteristics and fundamentals (limited supply, rare and exceptional in quality) and remains by far one of the most defensive segments. This tends to undermine many analysis based purely on a categorization by art period.
As an example, Citi’s research outlines that higher-priced works, especially paintings purchased for over $500,000 to $1 million – tend to perform better than lower-priced works.

      Source: Citi GPS: Global Perspectives & Solutions, December 2020

Overall, we remain far less optimistic regarding the more speculative zone of the ultra-contemporary market, given the unprecedented levels some emerging artists have reached (as discussed in our previous newsletter).
Crowd behavior always leads to mispricing
Financial markets have suffered recent corrections and have exhibited new correlations between certain frothy assets classes: crypto markets, DeFi coins have shown an increased correlation with technological equity stocks. That is why we think that overcrowded and speculative trades will be most at risk in the near future, and that includes certain names of the contemporary market. In the recent year, there were a group of 70 to 80 young artists that attracted most of the attention of auction buyers. Getting involved implied paying hefty premium. There will be some brutal corrections in this segment, granted it can take another 12 months to happen.
Newbies in the art market all too often assume that past performance is an indicator of future performance, but what is in will be out. What is out will not necessarily be in. If you overpaid for a trend, cyclical corrections will be painful.
Furthermore, this market focus on emerging artists is creating attractive opportunities in a number of established, art-historical relevant artists, who have suffered from decreased attention, both from cultural institutions (who need to display inclusion-oriented exhibition programming) and from collectors and who are priced below their potential.

Thus a contrarian approach, focused on underrated blue chip artists, that are currently out of trend and taste sounds pretty relevant.
In addition, in times of increased volatility across most asset classes, collectors will be drawn to more resilient artists, that have already proven their art-historical relevance. It’s a basic psychological reaction to focus on stability in times of turbulence.

The 59th Venice Biennale: Echo of current art market trends - a spotlight on female and non-gender conforming artists

The artistic director of the 2022 Venice Biennale, Cecilia Alemani, unveiled this week her curatorial plans for the 59th International Art Exhibition. The show will include 213 artists from 58 countries with more than 180 artists participating for the first time.
In sharp contrast to past editions, the number of female artists that have been selected
is close to a staggering 90% ! (The 2017 Venice Biennale had only 35% of female artists).

Alemani explained in interviews that she started doing her research in preparation of the Biennale with female artists, in particular with some historical works. It struck her how few people were able to mention a female Futurist artist or a female Bauhaus artist, even though all major movements of the 20th century, such as Surrealism, Futurism, included female artists.
Besides focusing on unknown or lesser known women artists to bring to the surface those stories that have been considered by many to be minor, a voice is also given to gender, non-conforming artists, who challenge the figure of man as center of the universe.
The Millennial generation (roughly 1980-1995) will also be pretty well represented with 60 artists, among which the likes of Wu Tsang, Christina Quarles, Elle Pérez, Jadé Fadojutimi, and the late Noah Davis.

Stolen art is thriving on NFT platforms: crucial issues such as the definition of authenticity need to be addressed

OpenSea, the largest NFT platform has grown at a vertiginous pace last year, and is now valued at $13bn. But amid its spectacular rise, the company is doing far too little to prevent the trade in fraudulent NFTs. For many artists, the past year’s crypto boom has also been a nightmare. One of the main issues is that anyone can “mint” a digital file as an NFT, whether or not they have rights to it in the first place, and the process is anonymous by default. It is far easier to make forgeries in the blockchain than in the real world. All you need is to do is a right-click.

90,000 alerts about possible frauds
DeviantArt, a decade-old online community for digital artists that hosts half a billion pieces of digital art, began monitoring the blockchain for copies of their users’ works last fall. As reported by the Guardian, it has sent 90,000 alerts about possible fraud to thousands of their users since then. It’s now scanning for fraud across 4 million newly minted NFTs each week !!! In December, bots began attacking the site scraping many works from the most popular artists. Later, these same pieces would appear on other NFT marketplaces, often with the artists’ names still attached. 

Another telling tale is the story of a Texas-based artist, who has found viral fame for painting riffs on Van Gogh’s Starry Night featuring various breeds of dog. She discovered 87,000 NFTs based on images of her works for sale on OpenSea. Trier said 500 listings of her stolen work were added in a single night, suggesting the theft was being automated and carried out by bots, which demonstrates how these thefts are being orchestrated on an industrial scale.

The only recourse artists have, as the legitimate creator of the work of art, is to write individual copyright infringement take-down requests to OpenSea and to manually monitor the platform for new fraudulent listings, a daunting task for artists, especially when their works are being looted at such a scale.

A lot needs to be done by NFT platforms to clean up their act, as artists should not carry the burden of policing art fraud. In addition the meaning of "digital ownership' needs to be assessed. When you sell an NFT, you register a cryptographic token on the blockchain and that token is unique. But if the asset associated with it is a digital good, it’s not totally truthful to call that good “unique” because it is infinitely reproducible. As for the digital file’s authenticity: if it is not accompanied by another form of certification, all we can do is trust in the good faith of the person who registered the associated token.  

These problems could be rectified. Encoding the artwork itself (instead of the token associated with it) directly “on-chain” is technically possible, but obviously it would increase massively the size of data on the blockchains.

We are only at the start of a new era, and NFTs are not going away, but we would call for extreme caution when investing in NFTs, as long as a crucial issue like authenticity has not been addressed properly by the nascent crypto ecosystem.

More to follow next month !

The LINK Management team 



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