- What High-End Art Says About Rich Investors Right Now
- Painting the picture for Sotheby's
- More rich investors are looking to make statements
- The future of investing among the rich
- Why is High-end Art So Outrageously Expensive?
- First, this is a golden age for wealth
- Art is now seen as a commodity
- Buying high-end art is also good PR
What High-End Art Says About Rich Investors Right Now
The stock market isn't the only way that people get rich. The market for high-end art and collectibles draws a loyal crowd of the well-to-do, and the ups and downs of art prices are often even more volatile than stocks.
By looking at the performance of companies venerable auction house Sotheby's (NYSE:BID), you can get some valuable insight into the thought process that art collectors have and glean clues about their willingness to pay top dollar for some of the most famous works of art in history.
Sotheby's recently released its second-quarter financial results, and the company's performance generally reflected a healthy market for art and collectibles.
Yet a couple of items that came up in the quarterly report point to some unusual activities that reveal the way some rich investors are behaving right now.
That in turn could help typical investors understand better how the changing fortunes of the rich affect the stock market over time.
Image source: Sotheby's.
Painting the picture for Sotheby's
To set the proper context, it's useful to look at Sotheby's second-quarter numbers. Revenue was up 2% from the year-earlier quarter to $345.6 million, while adjusted net income dropped by 25% to $58.1 million. That produced adjusted earnings of just $1.09 per share, which fell far short of the $1.56 consensus forecast among those people following the stock.
In the report, Sotheby's explained some of the countervailing trends it experienced during the period.
First, it noted that some of the company's annual spring sales occurred during the first quarter this year because of the timing of the calendar, which resulted in a slight bump early in the year at the expense of second-quarter results.
Sotheby's estimated that $130 million in net auction sales and $20 million in operating income got shifted because of the calendar effect.
Some of Sotheby's fundamental performance reveals further changes in business conditions. On one hand, consolidated sales figures were up 15% during the quarter, and private sales soared by 57%. Yet auction commission margin dropped substantially, weighing on Sotheby's bottom line.
The company explained the disparity through the sources of its auction items.
This year, Sotheby's has gotten more items on consignment from high-end sellers wealthy family estates, as well as charities and foundations.
Getting this business helps to cement Sotheby's reputation as a leader in the art auction market, but the company negotiates lower fees to obtain the right to auction the items, and that weighs on profits.
Sotheby's pointed specifically to two paintings on which it provided guarantees of auction results.
The company didn't provide many details, but reports identified one painting that sold through a single bid that had been prearranged and therefore provided Sotheby's with little net revenue, while the other fell short of Sotheby's sale-price estimate by roughly $10 million.
More rich investors are looking to make statements
By most accounts, the high-end art market has seen a modest recovery from the worst conditions of the past several years.
As CEO Tad Smith noted, “The market is clearly healthy, [and] the second quarter saw an enormous amount of property come to market.
” The CEO also pointed out that with the exception of those high-profile pieces, most of the artwork that Sotheby's auctioned got good reception from bidders.
The biggest success story for Sotheby's has been the way it's expanded its addressable audience. Online sales have soared, with new bidders gravitating to the e-commerce model.
Social media exposure has grown, and the company is getting more of its revenue from sales of middle-market items.
What that says is that a growing audience of high net-worth individuals is getting interested in art and collectibles, and even if they're not necessary as wealthy as the ultra-high net-worth families that have traditionally participated in the art market, they're helping to drive demand. Purchasing high-end art is a tangible symbol of success that one can't duplicate with a brokerage statement, and Sotheby's has sought to tailor its marketing campaign to provide the ego boosts that art buyers are looking to get from winning a high-profile auction.
The future of investing among the rich
For Sotheby's, miscues in pricing could hurt full-year results, but the auction house doesn't seem concerned about its long-term future. As it finds newly rich customers in areas across the globe — especially within some of its highest-profile Asian markets Hong Kong — Sotheby's will have the opportunity to present its growing audience with the items they truly want.
What ordinary investors can take from this is that as nice as it is to have a lot of money, rich investors want something more, something they can see and treasure. High-end art and collectibles fill that need, and as long as booming stock markets provide a strong wealth effect, the rich are ly to keep showing up on the auction house floor.
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Why is High-end Art So Outrageously Expensive?
The high-end art sector is currently booming with surging numbers of sales and record-breaking purchases. 2018 saw global art sales top $67 billion, an increase of 6% on the previous year. This year, a sculpture by Jeff Koons sold for $91.1 million—the highest amount ever paid for a living artist.
In 2017, the world’s most expensive art purchase so far was made when the Saudi royal family bought a (purported) Leonardo da Vinci painting for a jaw-dropping $450 million.
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But what is behind these trends and what can we learn from these staggering prices? Here we take a look at just a few of the myriad factors behind the booming global art market.
First, this is a golden age for wealth
It’s no secret that inequality has been increasing globally for decades as the rich hoard more and more wealth for themselves at the expense of the world’s less well-off. The filthy rich—those are people who have a net-worth of $30 million—tend to go by the less emotive euphemism of ‘Ultra High Net-Worth Individuals’ (UHNWI) these days.
In 2017 it was calculated that, although they only account for around 0.003% of the global population, UHNWIs hold around 13% of all the world’s wealth. The following year UNHWIs increased their total combined net worth to $31.5 trillion, up a healthy 16.3% on the previous year. So, it’s fair to say that it’s a very good time to be filthy rich.
In tandem with this increasing inequality, investment in art by the wealthy has seen a huge growth spurt. A report in 2018 indicated that the rich invested 21% more in art than the previous year, making it the first time in nearly a decade that they put more cash into paintings than their other favourite expensive luxury—wine.
So why is art the investment-du-jour for our increasingly wealthy friends?
Art is now seen as a commodity
The idea of art as an investment has been around a long time, but it really took off in the 1960s when wily industry figures decided to publicise the financial potential of art in order to capitalise on the booming post-war economy.
Thus, a leading British auction house teamed up with a London newspaper to periodically publish the Times-Sotheby Index—an investment index charting the increasing prices of art sold at auction.
The message was clear: art is a hot investment that can outstrip the returns on traditional assets.
In the decades since, art has been eagerly pushed as a lucrative asset class by pretty much anyone who stood to benefit financially—such as art galleries, auction houses, artists, critics, and the wider cultural and financial industries.
The parasitic financial industries, for example, have been using every tool at their disposal to inflate and exploit art as a source of revenue. And when they ran tools, they invented new ones.
Thus, recent years have seen a deluge of new credit products, derivatives, securitisation funds and even new blockchain technologies introduced into the art market to ensure ever higher amounts of money pour in.
Meanwhile on the cultural side, the capitalist institutions surrounding the art industry have done their part to milk the situation by hyping up artists, sales and patrons in a never-ending barrage of breathless praise, chin-stroking commentary and cynical publicity.
Buying high-end art is also good PR
Lastly, for wealthy countries and individuals who may find their positions threatened by bad publicity, conspicuous spending on art can act as a PR campaign to boost or manipulate one’s reputation.
Take the rival Gulf states of Saudi Arabia and Qatar, for example, the leaders of whom account for four of the ten most expensive painting purchases of all time.
Essentially, these wealthy rulers have been utilising their vast oil fortunes in recent years to re-brand themselves as benevolent patrons of the arts and to shift the reputations of their countries from those of repressive regimes to global cultural hubs, teeming with the world’s finest artistic specimens.
The best of example of this is the aforementioned most expensive painting ever sold: Salvator Mundi—bought in 2017 by a proxy of the Saudi Crown Prince Mohammed Bin Salman. This record-breaking purchase made headlines around the globe in 2017 for obvious reasons.
But ongoing developments have generated endless news and blog articles ever since as content-desperate outlets breathlessly covered every aspect of the mysteries surrounding the buyer, the disputes around the da Vinci attribution, the abandoned exhibition in the new Abu Dhabi Louvre and so on.
This eager coverage by a cowed and complicit media has been hugely beneficial to Bin Salman and Saudi Arabia, helping to pull focus away from negative stories about, say, their brutal war against Yemen or the murder of the journalist Jamal Khashoggi. Which goes to show that while the painting itself may turn out to be worth a fraction of the near-half-a-billion-dollar cost, the PR payoff may prove priceless.
From these factors we can see that art has become a valued vehicle for the world’s richest people to increase their wealth and power—in part because of its potential for considerable returns and its ability to confer status and prestige. All of which is underwritten and promoted by self-serving financial and cultural industries hoping to ensure the trend continues and the money keeps flowing.
Special thanks to John Ellmore from KnowYourMoney.co.uk for sharing this post!
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