Sotheby's fall auction in Hong Kong. Courtesy of Sotheby's

Before the fall auction season kicked off in October, most auction houses were adamant that prices would hold up, despite the economic crisis.

"The art market doesn't necessarily take the same direction as the broad economy," said Kevin Ching, chief executive officer of Sotheby's Asia, before its Oct 4-8 Hong Kong auction. "It wasn't affected in the last two financial crises."

But this crisis is different from those in 1987 and 1998. After toppling well-established global financial institutions, the credit crunch spread to the real economy and threatened a recession comparable to the Great Depression.

It became clear that even the rarefied realm of art was not spared when Sotheby's Hong Kong sale only reached half of what it had estimated, reflecting the general gloom. In a filing with the US Securities and Exchange Commission on Oct 23, the New York-listed company reported a $15 million loss on guarantees - the incentive money auction houses give to some consigners regardless of bidding results.

The situation at its rival Christie's was no better. Its postwar and contemporary sale on Oct 19 in London raised 33 million pounds, against the 58 million to 76 million pounds in pre-sale estimates. Nineteen of 47 works were unsold.

An obvious response to the slack is cutting the price. The results of the fall auction will become a benchmark for auctions next year, said Ken Yeh, deputy chairman of Christie's Asia. "If the results are not good, we'll lower the estimates by 20 to 30 percent."

Misung Shim, managing director of Seoul Auction Hong Kong, admitted feeling nervous about the art market as the economy deteriorates. "Yes, we're worried."

Overdue correction

Blaming the disappointing results on high prices set before the crisis deepened, auction house executives like to describe the slump as a "correction".

The correction is probably long overdue after years of booming in the art market. It's estimated that $20-billion to $30-billion worth of art changes hands globally every year, with half to one-third of the transactions occurring in auction houses.

There had been an obvious pattern of art deals following the money. From hedge fund managers in New York to energy tycoons in Russia, when personal wealth expands, so do their appetites for fine art.

But the aesthetic value is not the only objective of buying art. In the last couple of years, there was a keen interest in art as an alternative investment. This is due in no small part to a 2002 study by two New York University business professors, Michael Moses and Jiaping Mei.

Basing on the hammer prices of repeatedly auctioned artworks, Moses and Mei found that investing in art delivered an inflation-adjusted annual return of 10 percent for the 1954-2004 period. Although underperforming the S&P 500, art grew in value much faster than bonds (6.5 percent), treasury bills (5.3 percent) and gold (5 percent).

In recent years, art has been outshining stocks. Last year, "the 2007 increase in the return of the Mei Moses all art index of over 20 percent is recently only surpassed by some of the annual returns achieved during the art bubble years of 1984 through 1990," says the index's official website www.artasanasset.com.

On the flip side, investing in art can be quite risky. Moses and Mei found their art index more volatile than the S&P 500. Yale economist William Goetzmann once compared art to a "high beta" stock - one that rises and falls faster than others.

In their 2002 study, Moses and Mei also argued that art prices do not move in tandem with those of stocks, bonds or commodities and hence make a great diversification choice. But the "low correlation" factor seemed to have failed this time: The art prices have slumped, liked everything else.

The downward trend may continue, said Citi Private Bank's Art Advisory Service Senior Vice President Suzanne Gyorgy in an interview with Singaporean newspaper Business Times.

The Qing Dynasty imperial white jade 'Qianlong Yubi' seal fetched HK$63.4 million at Sotheby's Hong Kong auction, setting an auction record for white jade. Courtesy of Sotheby's

"A downturn in the equities markets often initially causes investors to turn to tangible assets. The art market can benefit from this turn to alternative investments with a bounce in the value, counter-cyclical to the equities markets," she was quoted as saying.

"However, a prolonged economic downturn in the equities markets will first result in a softening of the real estate market, which is then followed by a downward adjustment in the art market."

Demand is up

In the long run, however, an undeniable fact about the art market is that the demand is up. Taking the Sotheby's Asian market as an example, the client base has grown almost tenfold to 200,000 in the last decade, said Patti Wong, chairwoman of Sotheby's Asia.

"The traditional markets are Taiwan, Singapore and Hong Kong. Now we have clients from the Middle East and South America," she said.

Sotheby's fall sale in Hong Kong, though lower than expected, is nevertheless the third highest among the company's local auctions, reflecting a robust demand.

Even in prolonged economic woes, a crash of art prices would be unlikely because "the art market doesn't behave the same way as a stock market," said Shim, of Seoul Auction. "In a stock market, people tend to sell when prices are low. But in an art market, people tend to hold."

Owners' emotional attachment to collection is strong - in most cases, collecting art is also a hobby. When prices are depressed, chances of acquiring the most sought-after pieces could actually be lower because sellers are waiting for a better time.

Meanwhile, art galleries and dealers, with their large hoards of art works, do not wish to see an over-drastic adjustment. To protect the value of their holdings, they deploy strategies such as making anonymous bids at auctions.

Pundits are predicting an M-shape trend in the art market, seeing the buyers going for either the top-tier pieces and the low-price-range works with investment potential.

As auction results of the past month show, rarity still sells. A Qing Dynasty (1644-1911) imperial white jade seal, for instance, fetched HK$63.4 million, in excess of the HK$50 million estimate in Hong Kong, and set an auction record for white jade.

Works of lesser-known artists have also proved attractive. In its first Hong Kong sale of Seoul Auction, bids for young South Korean artists' works reached 3.5-3.8 times of estimates.

"It's a surprise to us," said Shim. Because of the turbulence of Korean won, Seoul Auction's Korean clients all canceled their bids. But the overseas interest proved stronger than expected: "Eighty percent of bids are non-Korean."

It seems the demand for art is here to stay and the economic crisis has only made buyers picky.

"When I look at an auction catalog, I can pretty much tell what can be sold," Shim said. "The good pieces and the good prices."

It's as simple as that.

(HK Edition 11/05/2008 page4)