Impact of COVID-19 on Art as an Asset

The initial stages of the Covid-19 pandemic led to a substantial drop in asset values across markets, having a disproportionate effect on highly leveraged assets. The first phase of this correction has been a brutal de-leveraging process generating high levels of margin calls.

To meet these extraneous margin calls, there has been a large increase in enquiries about the use of art as loan collateral. According to Deloitte Art & Finance Report 2019, art is one of the least leveraged private asset classes, standing at 2% of wealth in private hands.

The remarkable growth of this asset class in the past 30 years and its performance in times of stress, combined with conservative levels of applied leverage, make it an attractive option. In addition, recent regulatory changes with the AML Directive 5 render the art market more transparent and reliable.

We have solid clues about the future economic behaviour of art as an asset through experience and a large body of research on factors affecting art liquidity and volatility, but we also critically need to look at the correct variables when making lending and collateral monitoring decisions, as is the case with any other asset class.

PART 1: A market structure in transition

Art markets adapted quickly to the new norm:

·       Both Christie’s and Phillips have moved their ‘mega’ sales week, traditionally taking place during May in New York to the month of June; the London June sales were incorporated to the New York’s sales. 

·       Increased use of online sales technology for major sales, previously reserved for art valued in a mid to lower range, or alongside a live sale to generate competitive bidding. 

·       Fairs were cancelled one by one, starting with Art Basel HK, through smaller fairs such as Photo Paris, ArteBA, Dallas Art Fair, and Art Cologne, and the most recent postponement of Tefaf NY. Online viewing rooms are providing a platform for continuous engagement with the community, however tangible sales have been sporadic for most.

These will result in an overall result of a fall in trading volumes in the market due to operational issues, over and above the effects of the crisis itself. Owners of important artworks will likely choose to wait for markets to settle and hold back offering consignments and leverage solutions are likely to be favoured.

The impact of these market movements on individual artworks will depend on the work’s specificities, but one can broadly say that:

·       The art market does not operate in a vacuum - research shows that art prices are positively correlated with stock returns and top incomes, and that art consignments are positively correlated with economic growth. 

·       Post-War & Contemporary Art carries more systematic risk and is more exposed to art market movements than Impressionist & Modern and especially Old Masters 

·       Supply will diminish substantially as collectors sell only as a last resort, with leveraged solutions being actively thought out. 

Catch Part 2 next week to learn about liquidity analysis - the core of Overstone’s products and services.