The Art Market is Surging and Lifting Auction Houses on the Ride UpFeb28

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Daily Intelligence Briefing – February 28, 2018

FEATURED TOPIC: THE ART MARKET IS SURGING AND LIFTING AUCTION HOUSES ON THE RIDE UP

International art auction houses are feeling bullish again, and for good reason. The art market is surging, as evidenced by the strong sales posted by the major auction houses in 2017. Christie’s sold about $7.3 billion of art and collectibles worldwide, a jump of 26% from 2016. Similarly, Phillips’ sales rose 25% from 2016. Sotheby’s will release its 2017 earnings results pre-market tomorrow (March 1). Looking ahead, sentiment is extremely bullish at the major auction houses, which are anticipating another stellar year of sales. 

HERE’S WHY THE OUTLOOK IS AUSPICIOUS FOR THE ART MARKET

1. Bullish Sentiment by Sellers
2. Synchronized Global Growth, Rise in Asset Prices, U.S. Tax Cuts
3. New Selling & Marketing Formats Attract Younger Demographic
4. New revenue streams
5. Rising Asian Sales

The global art market experienced a boom in the first half of this decade, and nearly doubled in value thanks to soaring demand for contemporary art. Then, several adverse factors hit the market mid-decade: oil prices crashed; stock markets around the world sputtered; an anti-graft campaign in China created a drag on luxury shopping for and by Chinese executives; a series of high profile scandals erupted in the art world. A lot of the fresh money that had driven art sales to new heights evaporated as hedge fund managers, oil barons, and other high net worth (HNW) buyers retreated.

That sent the global art market into a tailspin: Sales peaked in 2014 at $68.2 billion, fell 7% in 2015, and plunged another 11% to 56.6 billion in 2016. Although dealer sales declined just 3%, the aggregate value of sales at public auctions fell by 26%. Shares of Sotheby’s, the biggest publicly traded auction house, tumbled more than 60% from its 2014 highs before rebounding in 2016 following a reorganization & modernization push engineered by activist hedge fund Third Point.

RENEWED CONFIDENCE BY SELLERS

As this year’s spring auctions kick off in London, it is clear that confidence is returning to the art market. Encouraged by 2017’s very strong sales for high-end art, including the $450 million sale of Leonardo da Vinci’s Salvator Mundi, more privately-owned masterpieces are on auction this year, including works that have not been seen on the market for decades. The mainstay at the London sales of Christies, Sotheby’s and Phillips will be Pablo Picasso, whose household-name status especially appeals to new collectors from Asia, where Christie’s now derives a third of its buyers for these sales.

Overall, the three houses expect to sell at least $772 million worth of impressionist, modern and contemporary art combined, roughly on par with last year’s series, but up 25% from 2016. The spring sales will gauge global demand and can reset the price level for the world’s top artists. Here are a few “fresh face” and “second look” stunning works to watch in the London auctions.

SYNCHRONIZED GLOBAL GROWTH, RISE IN ASSET PRICES, AND U.S. TAX CUTS

The auctions are of interest to stock investors as well. That’s because art sales, although not a direct proxy for the “real” economy, correlate strongly with other important indicators. Robust sales are a sign that the world’s wealthiest people feel bullish about the economy, something that the 0.1% and the other 99.9% can be equally excited about. The U.S. commands first place for global art sales by value, followed by the U.K. and China. Together, the three countries represent more than 70% of the global market, which back in 2016 was valued at $45 billion, per TEFAF’s Art Market Report 2017. Last year’s phenomenal sales would have increased that number. A synchronized acceleration in economic growth around the world, along with recent massive tax cuts in the U.S. should aid the recovering art market.

NEW SELLING & MARKETING FORMATS

The major auction houses are still operating on business models that haven’t evolved much in the 274 years that Sotheby’s has been around. One of their priorities is to cultivate a younger demographic — examples would be thirty-somethings decorating their first home, younger art enthusiasts that frequent galleries already, or those searching for their first investment piece. 

Online bidding has helped a new generation of buyers find footing at the major houses by removing the intimidating factor that keeps many away from traditional live sales. In fact, online auctions — both online-only sales and online bidding during live sales — are now the largest entry points for new buyers. In 2017, 37% of Christie’s online bidders were new to the auction house, as were 53% of Sotheby’s. Buying art is easier than it has ever been, which will boost the bottom line of auction houses.

More than the other traditional houses, Sotheby’s is leveraging technology to expand its reach across demographics and geographies. Making specialists more accessible online, particularly on messaging platforms like Weibo and WeChat, has increased new buyer engagement significantly. When upcoming auctions are listed on these platforms, prospects can direct-message a specialist to learn more about a piece. Conversely, potential sellers can upload a photo of a painting or sculpture they own and request an estimate with just a click of a button. In the past, the only way to request an appraisal was by printing and manually filling out a sheet of paper to be returned to Sotheby’s — an outdated process that has proved to be a deterrent to new sellers.

Sotheby’s is also integrating augmented reality (AR) and virtual reality (VR) into its sales & marketing process. These tools have been a hit with young and seasoned buyers, as they allow users to experience art from an entirely new dimension or to feel as though they are stepping into a surrealist world created by the likes of Dali and Magritte.

NEW REVENUE STREAMS

The auction houses have also moved into the business of lending to art owners, some more aggressively than others. When art sales are down, lending provides a welcome revenue source. Borrowing against art lets owners extract value from their collections without having to sell low; lenders, meanwhile, can charge rates much higher than those on traditional loans. For instance, Sotheby’s financing revenues have more than tripled in a few years. The company charges about 600 basis points above Libor, using the art as collateral.

RISING ASIAN SALES

Another bright spot has been a surprise uptick in the Asian market, especially now that China’s anti-graft campaign seems to have receded. Historically, Chinese collectors have favored a nationalistic bent, but the country’s art aficionados are finally embracing the western market. There are perhaps 2,000 billionaires in China and only a very tiny percentage are buying serious quality Western art. It’s only a matter of time before they buy many more of the major Western masterpieces.

Things are looking up for the art market. While Christie’s and Phillips are privately-owned entities, Sotheby’s (BID) is the biggest publicly traded auctioneer in the art world, and its share price appreciation since 2016 reflects the overhaul of its business model as well as improving industry fundamentals. As the chart below shows, the Artprice.com Global Index has yet to mirror the improved market conditions, but that’s likely to change over the course of the year.

HERE IN THE MEANTIME are some related articles on the Art Market & Auction Houses (the stories are summarized in the SERVICES section of today’s report):

• Art Market – How Auction Houses Are Engaging Younger Collectors  
• Art Market – London Auctions Aim to Capitalize on Art Market Surge  
• Art Market – The surprising economics of ridiculously expensive art

CHART: GLOBAL ART PRICE INDEX vs SOTHEBY’S (BID) vs S&P 500 (SPY); 20-year and 9-year performance

OTHER STORIES HIGHLIGHTED IN TODAY’S DIBS:

• Markets: 
  • Bonds – King Cash Threatens the Reign of Credit Markets From U.S. to Europe  
  • Stocks – Cronos Group Will Be Nasdaq’s First Pot Stock  
• Monetary Policy: 
  • Fed – Powell Says Strong Outlook to Prod Fed to Review Rate-Hike Path
• Finance: 
  • Lending – The Mortgage Market Is Moving Into the Shadows 
  • Mobile Wallets – Sikur creates $799 hack-proof smartphone to keep cryptocurrencies safe 
  • Payments – Mastercard tests pay as you go for solar energy in Africa  
• Real Estate:
  • CRE – Harsh Flu Season Hits Senior-Living Firms With More Pain to Come  
  • Housing – Home prices surge 6.3% in December amid critical housing shortage 
• Technology: 
  • 5G – U.S. Wireless Carriers Plan to Launch 5G With ‘Pucks’ Not Phones  
  • 5G – Network Builders See Light at the End of Tunnel as 5G Approaches
  • Chips – Putting AI in Your Pocket: MIT Chip Cuts Neural Network Power Consumption by 95%
  • Electronic Components – Slowing smartphone sales are hitting the earnings of parts suppliers
  • Financial Internet – Websites That Pay Users With Blockchain Aim to Disrupt Facebook 
• Commodities: 
  • Lithium – Lithium Suppliers Tumble on Oversupply Concerns  
  • Metals – Iron Ore Surges to 10-Month High 
  • Oil – U.K. Is Set to Become Net Crude Oil Exporter  
• Biotech: 
  • CRISPR – Scientists just got a step closer to treating incurable diseases  
  • HC – Apple is launching medical clinics to deliver the ‘world’s best health care experience’ to its employees  
• Endnote: 
  • CHART: Private equity buyouts running at fastest rate since crisis

JOE MAC’S MARKET VIEWPOINT

• Joe Mac’s Market Viewpoint: The Coming Value Rotation
• Joe Mac’s Market Viewpoint: Beyond the BOND BUBBLE
• Joe Mac’s Market Viewpoint: A Review of MRP’s Latest Change-Driven Investment Themes
• Joe Mac’s Market Viewpoint: The Gathering Storm
• Joe Mac’s Market Viewpoint: Contrarian Crude Call

CURRENT MRP THEMES

About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP’s compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics. 

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