Indian Art Market – Another Bubble?

Background – Indian Art Market

A lesser known beneficiary of the Indian Growth Story has been the Indian Art Market. The booming Indian economy while on one hand propelled India to the global stage. On the other, rising disposable incomes drove growth across many sectors. The Indian Art Market – one among these sectors – also grew, albeit in a relatively small, yet noticeable proportion.

Until the late 90s in India, arts work were essentially a stronghold of a select few connoisseurs, the extremely rich and large corporations. Not a big market certainly. However, by 2008, Indian art market had grown by 830 percent through a decade. To a large extent, this growth was fuelled by the rising affluence. And also due to rising interest of western collectors in Indian arts work. Consequently, as if in a dream-run, Indian arts work suddenly had a plenty of room to appreciate value-wise. Remarkably, the participation of the local population in the art market greatly catalyzed the growth.

However, one wonders as to how so many well heeled Indians suddenly started appreciating artistic expressions from and about the detritus of life?

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 last November. In fact as per the market reports, investment in the said fund appreciated by around 5 percent only after a three year lock-in period. During the same period, Sensex grew by 51 percent and gold by around 77 percent.

Globally too, the Indian art market suffered severe battering. The buoyed visions of high returns left too much money chasing a few arts work, consequently jacking up the prices. The investor confidence was brought to a sudden halt by the powering down of the economies. Abruptly, Indian arts work could not find buyers. In September 2008, at Sotheby’s, all Indian lots were reported unsold. By end 2008 Indian art market slid 71 percent from the previous year’s level.

Eventually, the Indian art market entered a corrective phase.

The Present

During the past year, Indian economy has substantially rebounded from the shocks of 2008-09. The confidence too has returned to the art markets. As if the art market follows the stock market sentiments. And quite unlike what arts investments were purported to be – a shock absorber against doldrums in sensex. At Sotheby’s again, the combined auction sales for Indian and Southeast Asian art during period March 2009 until March 2010 raised a total of $15.2 million. A major chunk of this was collected in March 2010 – USD 8.2 million. The confidence in Indian arts work is on the rise again. In fact, a recent report by ArtTactic claims that the overall Indian Art Market Confidence Indicator has risen 26% since October 2009. As a result, the perception of speculation in the Indian art market is on the rise.  The ArtTactic Speculation Barometer for Modern Indian Art is now at 6.3, up from 4.9 in October last. This is the highest reading since ArtTactic started its survey in May 2007. A scale of 6.3 indicates that speculation is in a very healthy stage.

Does that mean that any further increase in scale would definitely indicate another bubble in the Indian art market?

Only time can tell that for sure.

Should one Invest in Indian Art Market?

Even though there is little historical evidence on the performance of art investments in reference to stock markets, there seems a high degree of correlation between the two. However, one thing can be said for sure – investments in art do not always make a better diversified portfolio. According to Artprice the global art market declined 7.5 percent 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. For the academically inclined, there is a good paper that can be accessed to know further details [download]. Some key observations on portfolio diversification through art works from this paper include:

• 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.

The Case of Indian Art Funds

Indian art funds, more or less, can be equated with mutual funds. Just that they do not come under the purview of the Securities & Exchange Board of India. 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. As such, the problem lies therein. The art funds holds on to artworks for a certain period after which they would sell it. Since the market knows when the fund would sell off, the prices are bound to crash. Art Market is quite unlike mutual funds wherein one can sell on the day of redemption. As of now, the single most important problem for art funds has been their lack of planning on a phased exit plan.

Yet still, art funds are a new concept in India. However, a discerning investor should know when to invest and when to leave the art market. Likewise a collector should also plan out aquisitions based on market signals. As of now, market signals which are good for investments will be quite opposite for collectors and vice-versa.

Top Image Source – Inflationary Bubble by Pulpolux

Tagged as: art, art investment, art market, funds, India, Indian Art Market, indian art market confidence indicator, indian economy, Random

~by Nitin Srivastava

Nitin espouses to be a libertarian, he loves to read & learn about anything (make that everything). He has a keen sense of observation, and can tell about the guns in ladies' purses by just looking at their heels. Do you get the drift?

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