Market Insight

by AAMRA

It is often said that a beneficiary of the Indian growth story has been the Indian Art market. Until the late nineties, art in India was essentially the stronghold of a very small circle, variously described as 'connoisseurs' the extremely rich individuals or the extremely large corporations.  It was thus by no means a large market. However, according to some estimates, by 2008, the Indian art market had grown by 830 per cent through a decade. To a large extent, this growth was fuelled by the rising affluence in India, and also due to rising interest of overseas collectors in Indian artworks.

But what about the rosy scene in India? Why did so many well heeled Indians suddenly start appreciating artistic works from and about life?

Nitin Srivastava, a voracious market analyst writing in analectic.com notes“. It certainly isn't a case of artistic appreciation in totality. While the number of genuine art aficionados too increased during this period, it certainly wasn't a number that could loudly inflate prices. In reality, the profile of an Indian art collector has changed drastically. Right now, an Indian arts work collector has a much younger profile than the days until '90s. Riding on the wave of new found riches, several young professionals and entrepreneurs see the Indian art market as another investment opportunity. Art became an excellent investment product and would prominently figure in portfolio allocations of many. Consequently, in a market full of willing investors, a number of art funds came up. Funds like Osian's Art Fund, Religare Arts Initiative, Copal Art Fund, Kotak India Art Fund etc cropped up to capitalize on the high net-worth individuals' perceptions of arts work as a capital asset.

“It was primarily because of the twin effect of collectors and investors that the art valuations skyrocketed. It was estimated in 2008 that Indian art market consisted of 70 percent speculators and 30 percent collectors. Yet still, the Indian art market was presumed to be undervalued in 2008.

“However, the global economic crisis of 2008, just like it had deteriorated stocks, commodities, and economies, badly affected the arts market too. It now appears that the investment in art works were based on two fallacious reasons. One, it was presumed that art works would appreciate by around 18 to 25 percent year on year. And two, art works can provide an alternative shield against declining stock markets. None of it happened. India's first art fund- Osian's Art Fund- was nowhere near to the proclaimed returns when it closed. In fact as per the market reports, investment in the said fund appreciated by around five percent only after a three year lock-in period. During the same period, Sensex grew by 51 percent and gold by around 77 percent.”

This calls for a very pertinent question. It has been variously argued that the health of the art market depends on the stock market. However, in most cases, it has been seen, even globally that the two seem to function in an apparent unrelated manner.

Artprice.com, in its latest market report on the state of contemporary art notes:

“During this past year (2010-2011), financial market jitters and poor economic indicators on both sides of the Atlantic have put additional wind into sails of two assets: gold and art.

“In effect, fuelled by the deepening debt crisis, the slowing economies of Europe and the United States during H1 and the difficulties encountered by banks, confidence in traditional financial assets has melted away in favour of gold1 (whose price has doubled in two years) and art, which posted the best secondary market performance in its history in the first semester of 2011. Contrary to standard assumptions, the crisis of 2008 hit the art market instantaneously, without any lag. In 2011, the market has adopted a far more philosophical approach, particularly after the painful experiences of 2008, and it now represents a viable alternative to the different classes of assets whose values have been seriously damaged by the crisis.

The art market's new and emerging strategies (online auction sales, accelerated information circulation, network connection of market's players at a global level, opening of markets, etc.) is tending to encourage and facilitate investment in this sector, which is no longer reserved for insiders.”

The phenomenon holds true for the Indian art market too especially the contemporary market. The market trends series in artetc. news & views had earlier noted that it is still the moderns, as opposed to the contemporaries who hold the top end of any marketIndian or global. According to some sources, the price of Indian art, despite the increase in the Art Tactic Confidence Indicator has actually taken a batteringespecially so among the contemporaries. To give an example, a collector, who does not wish to be named had in a recent online auction bought artworks by Indian contemporaries at half the price he would have paid four or five years back. Incidentally, he says he was fully aware of the fact that the resale value of these artists may decline even further in days to come.

So is it worthwhile to invest in the Indian art market now as an alternative investment portfolio?

According to an expert, “investments in art do not always make a better diversified portfolio.” According to Artprice the global art market declined 7.5 per cent in the first quarter of 2008. This plunge was attributed to the then deteriorating world economic scenario. Some research that has been done on this subject also point that art has limited role in terms of portfolio diversification.

Experts working on the subject have noted a few observations in this aspect:

“In the case of European and American paintings, there exist little or no diversification benefits when art is included in an optimized portfolio.

“An “ordinary” portfolio that features stocks and bonds seems to dominate any portfolio that also includes art, with a few exceptions for Belgian and German art, respectively.

“In terms of a causal relation between the art market and London Stock Exchange (LSE) it has been established that the LSE influences the art market. It is wealth that determines the price; i.e. a rise in the stock market appears to relax the wealth constraint, which then increases prices for art.” (analectic.com)

So, coming to the question of investing in art and the case of art funds, it can be said that at the moment, Indian art funds, which operate more on the lines of mutual funds are yet to come under the purview of the Securities and Exchange Board of India. They operate in the following manner-- an investor to an art fund invests in a pool of art works the fund invests in. However, the investment is locked in for a certain period after which the investment is redeemed on the basis of the Net Asset Value of the fund. And here lies the problem. The art funds have a certain lock-in period for the artworks they invest in. However, in the absence of any standard prescription, this lock-in period varies from one art fund to the other. In the absence of enough diversity, the market knows when a particular art-fund will let go of an artwork. Thus as an obvious market reaction, if the price for that piece/pieces of artwork does not crash, the market will definitely try its best to level-out its price structure.

The dynamics of the art market actually is quite unlike the dynamics of the mutual funds market, wherein one can sell on the day of redemption. The single most important problem for art funds? Easy to seek. Their lack of planning on a phased exit plan.