Guest Author of May 2013: Clare Mc Andrew

Clare Mc Andrew is cultural economist and investment analyst. She is the director and founder of Arts Economics, a Dublin-based research and consulting firm specialized on the art economy. McAndrew has extensively researched and published on the globalization of the art market, and specifically on the emergence of new sectors of investments, markets and investors. Clare Mc Andrew closely collaborated with the GAM research team on the development of the art market section in the documentation display “Room of Histories,” and on the realization of the film trans_actions. The Accelerated Art World. Both were presented in the exhibitions The Global Contemporary (ZKM Karlsruhe, 2011), and Nothing to Declare? (Akademie der Kuenste, Berlin, 2013) and also featured in the recent volume The Global Contemporary and the Rise of New Art Worlds (ZKM, MIT Press, 2013). In the following interview Clare Mc Andrew discusses with Hans Belting on the peculiarities of the art market, and the changes and shifts that the market has undergone because of the financial crises and the appearance of new players. We are very grateful to McAndrew for her precious contribution and we hope this conversation will open many discussions amongst our readers.

The Art Market. Hans Belting in Conversation with Clare McAndrew

Karlsruhe, February 20, 2011¹

Hans Belting
Clare, what was your original idea or motive when you started your project?

Clare McAndrew
It began with my interest in the art market. I started out as an academic economist, and I think a lot of the pioneering research in the financial studies of the art market had started in some form of academia. But I looked at how the international trade in art differs from the way other markets and other industries trade. And I started to look at the differences in how people buy and sell, and I found that the art market had a lot of unique features. So I began to look in a more academic perspective and then worked as an economist in the U.S. for a number of years for a small specialized firm that just worked in the art market, and came back to Europe in 2005 and started my own company, focussing on fine and decorative art research. So I’ve been looking at the market for about fifteen years, but always from the point of view of an economist looking in from the outside. It’s always a kind of outsider’s view, but a different perspective, maybe, than others.

Belting
You mentioned the unique features of the art market. What are those unique features?

McAndrew
One of the key things about art versus, for example, trade in commodities is that artworks are unique. Each work has no substitute. So even works by the same artist or a series of prints, they are not necessarily substitutable, so it’s a very heterogenous market. And art trades on a very thin and illiquid market, thus the turnover in the art market is very slow compared to other markets. And these features make it more difficult for us financial people to apply very standard, black box quantitative models to it – they throw up a lot of difficulties in valuation. But we’ve come up with methods to get around that. So it’s a different marketplace, but we’re getting our arms around how it is valued and how it functions. But it does have these unique features, and they are based on the fact that each good that’s thrown up on the market is quite unique. I did some research a few years ago, and it takes about thirty years on average for a piece of art to reappear on the art market after being sold. So, for example, if you sell a piece it probably won’t resell for another thirty years. That was the average we’ve found, and in fact some pieces never resell. So it’s a slow-moving, unique marketplace that makes it very different from other financial markets.

Belting
It is a recent phenomenon that a lot of economists have addressed the art market who in former years did not pay very much attention to it. Is there a special reason why there is this sudden new interest in the art market?

McAndrew
I think definitely there is; you just have to look at the numbers. Last year, in 2011, the art trade turned over 64 billion dollars in sales. So it’s very easy to see why it has attracted the interest of the mainstream investment community: it’s big business. And it’s also a very global business. There are literally art sales happening all over the world. It’s been very geographically dominated by New York and London until the last few years where it has become a lot more global and diversified marketplace. So it’s a big global business, and this is why it really sparked the interest of economists like myself and the mainstream investment community.

Belting
You mentioned several times the difference between trade and sales. Could you perhaps explain this a little bit?

McAndrew
Sure. There are a lot of trading centers in the art market. It’s made up of global hubs where much of the trade takes place, and then it’s made up of a lot of domestic marketplaces. So when we talk about sales we talk about what’s happening on the ground in a particular country or city, whereas trade is the flow in and out, the imports and exports of art. So these are two related but not identical events. Some markets might be what we call entrepôt markets where they have a lot of trade flows in and out, and buyers and sellers often come from a completely different place than the hosting city… So you have big global entrepôts and then you also have large domestic markets. And the biggest example of that in recent years is China, which is now the largest art market in the world. It came from virtually not being on the map at all ten years ago. If you look back to the end of Chairman Mao’s reign in the late 1970s, it was actually illegal to own or inherit or trade a piece of art in China. So it was completely closed off against the rest of the world, and now it’s the largest art market in the world with 30 percent of all sales. But that’s a very good example of a very domestic marketplace. Mainland China doesn’t trade a lot; it doesn’t do a lot of importing and exporting with the rest of the world, but it has huge sales in cities such as Beijing and Shanghai. So that’s a very good example of that concept. If you look at the more traditional, older markets of New York and London, they do both: they have a lot of sales and they trade a lot. Or a very interesting market may be Switzerland, which has a lot of imports and exports but not many sales on the ground. So that’s another case in point. There’s a difference between flows and actual sales on the ground.

Belting
You published recently the book Globalisation and the Art Market. Now for us this is a very clear example of how and in what sense to speak of the globalization of art, especially of contemporary art. So could we perhaps talk a little bit about the features which come from globalization and such features which single out contemporary art as a unit of its own?

McAndrew
I think when I was looking back at the first decade of this twenty-first century the key things that are really going to stand out about contemporary art are firstly, the huge increase in the size of the market. The market increased nearly tenfold from around 2002 to its peak in 2007/2008. So it was a period of astonishing growth – the contemporary sector amplified what was going on in the market as a whole. Contemporary art was that much more volatile up and down. It went through a particularly rough patch in 2009, the market contracted by around 70 percent, but it has recovered very strongly again. So it’s been an extremely volatile marketplace. It’s seen some highs and lows, but over all it’s been a period of growth relative to any other periods. And although 2009 saw probably the worst recession since the recession of the early 1990s, it’s still at a much higher level than it’s ever been, and in 2011, it surprised us once again and is at a higher level than the peak of 2007.
Besides that growth, I think one of the key features about the art market now is that it’s a very global trading. And the most important markets for contemporary art are now definitely outside Europe. In 2010 the U.S. was still the largest contemporary market, but China overtook the U.K. to be the second largest. In 2011, China is by far the largest – based on auction sales it had a 45 percent share versus the U.S. at 25 percent. And China has come from virtually 1 percent or 2 percent in 2002. So it’s been an astonishing rise, and it’s these markets outside Europe that have really helped the art market as a whole and contemporary art especially to come out of the hole it was in 2009. The fact that the contemporary art is now much more globally diverse has helped protect it from the downside risk that it would have been subjected to had it only been reliant on buyers and sellers from the U.S. and Europe. So that has helped it to recover stronger and has protected its downside a lot more than would have been the case had it been that very New York-London-polar market that it once was.

Belting
Is this also maybe the reason for the quick recovery?

McAndrew
Yes, definitely. The recovery, especially in contemporary art, has been driven by the U.S. and China. So it’s been a recovery in the U.S., but another year of continued boom in China. China has seen a massive increase in sales. The Chinese market as a whole is now generating sales of over 15 billion dollars with dealer and auction sales and all the different categories. While other markets have tried to recover from a couple of very poor years, it’s just been another year of boom in China. While the U.S. and China had growth figures of over 100 percent in 2010, Europe was positive on the whole, but sluggish compared to the rest of the world. So the most important markets for contemporary art are now definitely firmly outside of Europe. But I think in the future what we’ll see is that there’ll be many centers all around the world; there won’t be this idea of the art market as New York and London. There will be maybe six, seven or eight or more centers all over the world. Definitely a couple in Asia, something in Europe, something in the U.S., maybe something in the Middle East. It will be a more globally diversified picture in the future.

Belting
Is it also relevant for the type of clients who are acting in these newly developing centers?

McAndrew
Absolutely. Considering the Asian boom first, these trends are supply-driven to some extent especially in China, which has a great wealth of art to sell, but they are also very much demand-driven. The global shift in wealth is dominating what’s happening in the art market, so the fact that China is now the fourth highest base for high-net-worth individuals has really driven sales there as well. But I think what’s very interesting if you look at China, India, Brazil, all these countries, their average incomes have increased by maybe 200 percent on average over the last ten years. So they’ve come from very poor average incomes, and in some cases they literally increased ten or more fold. But despite this, they’re still much lower than incomes here in Europe or in the U.S. What’s happening in all these countries still is that art is being bought by a very small handful of people, if you look at China, Brazil, India, or any of these new emerging markets. So it’s a very strong indicator for the future, because average incomes are expected to keep on rising at a fairly rapid pace. In countries such as China and India, the middle class hasn’t even come on stream yet. For example, in China the average income now is about 5,000 dollars a year, and they expect that by 2020 it’ll reach about 10,000 dollars. And this is when they expect a middle class will have formed within China, and these people are not even buying art yet, so it’s a very strong indicator for the potential future expansion of the market – the growth trajectory is very strong. It’s interesting to think how it’ll look in the future if these trends keep going. But it has been wealth-driven in many respects. Art does tend to follow where the money is to some extent.

Belting
Is it also a different psychology for clients to go to an open auction instead of into a gallery?

McAndrew
Yes. I think a lot of the newer buyers from emerging markets are tending to buy from auction first, because it is the kind of concept that you don’t need to know so much, whereas there’s an impression (which is not necessarily correct) that you need to know a little bit more about art when you buy from a dealer. But I think it’s a more obvious channel for buyers to use first. So novice buyers tend to buy first at auctions, and when they become established collectors in particular sectors they’ll hook on to dealers and use them more. That tends to be the path they take.

Belting
In art circles the subject of art speculation or speculation in investing in art is still a bit looked down upon. If you are consulting people to choose art, what are the advantages? I mean you are an economist, you are free from these prejudices which we have that it is just commerce and lacks the feeling for art. You look at it from another side.

McAndrew
Sure. But I think art is definitely accepted now as an asset class. And collectors that I speak to might even say they’re not interested in this financial value, but I think there is probably a spectrum that exists between the icon of pure collectors and pure investors, and neither end of that spectrum is a very good position to be in. If you’re a pure collector and you don’t care about the value – you are in danger of ignoring a lot of responsibility that goes with owning art at a high level for the next generation and for art itself. And if you’re a pure speculator – you’re in the wrong market! I would not advise people to speculate in the art market at all. I think it is a long-term investment, and I think there’s often an over-focus on how much the price is going to increase on returns in the art market. I think the most attractive investment perspective that art has is its risk properties, so the fact is that art often moves on a very different level than a lot of other financial and other asset indices. So it can be a very good tool for risk diversification in your total wealth portfolio. Adding art into a diversified portfolio, or the risk dimensions of art as an asset, are by far its most attractive feature. And there’s obviously no such thing as the art market as a whole. There are hundreds of independently moving markets within the art market all operating at their own level and on their own different growth path. So you cannot only use art as a tool for risk diversification within a portfolio of wealth, but your art portfolio itself can also be held in such a way to reduce risk. You can hold art as a diversified collection if you can build a kind of an eclectic collection of art, which a lot of people are increasingly trying to do. You can actually be internally diversified within the art collection itself. So I would always advise not to over-focus on returns, I would advise not to speculate. But I think the risk dimension is one that is going to be the thing people focus on. People have got very badly burned in trying to speculate not just in art but in other sectors of the financial markets, and I think what they are looking for now is long-term secure assets with tangible value. And I think this is why art probably fared a lot better during the recession than a lot of other asset classes. It had that idea that it was a real, physical asset, it had enduring value and this value tended to increase over time. It’s a buy-and-hold strategy for art investing, and also a very useful and often tax-efficient way to transfer wealth through generations.

Belting
We have learned a lot about globalization from these crystal-clear analyses of the art market. And there is very good reason for art experts to engage with the art market; certainly to a greater extent than has hitherto been the case. It is a new world that opens before us, and you have given us a very good introduction to the globalization of the art market. Thank you very much indeed, Clare.

McAndrew
Thank you.

¹ The interview has been realized and filmed for the “Room of Histories” and is now also part of the book The Global Contemporary and the Rise of New Art Worlds.