Inflation, the economic phenomenon that erodes the purchasing power of money, is a persistent concern for investors worldwide. It’s particularly pertinent in today’s economic climate, where inflation rates are on the rise in many parts of the world.
Traditionally, investors have sought refuge in assets like gold or real estate to hedge against inflation. However, one asset class that has remained largely inaccessible to the average investor is fine art.
This is where Masterworks, a groundbreaking platform, steps in. It allows individuals to buy shares in masterpieces, effectively democratizing the art investment market.
By doing so, the platform also provides a new avenue for hedging against inflation. Nigel Glenday, the Chief Financial Officer of Masterworks, recently appeared on The David Lin Report, to talk about why art valuations are largely immune to currency fluctuations.
Blue-Chip Art Has Limited Supply, and Demand Is Steady
In the interview with Lin, Glenday shed light on some of the unique dynamics of art investments.
“You’ve got an asset that has relative scarcity… and on the other side of that, you have a wave of demand that’s coming from capital accumulating among the ultra-high net worth globally,” he said.
This supply and demand dynamic, particularly for works of artists who are no longer alive, creates a pattern of appreciation over time. As grim (and as obvious) as it may sound, artists who have passed away cannot saturate the market with additional artwork.
The scarcity of these artworks, coupled with growing demand from wealthy investors, creates a rare investment opportunity. This dynamic is particularly relevant in the context of economic inflation, where tangible assets that can hold their value are highly sought after.
Art as a Tangible Asset Against Inflation
One of the key reasons why art investments are effective for hedging inflation is their tangible nature. Glenday emphasized, “We’re talking about a tangible asset that doesn’t have a coupon or cash flow associated with it, that can either be inflated away or be impacted by FX rates.”
This means that, unlike stocks or bonds, the value of art does not depend on the performance of a company or government, but on its inherent worth.
Furthermore, the value of art is not directly tied to the fluctuations of the economy, making it a resilient investment choice during inflationary periods. This is because the value of art is determined by factors such as its historical significance, the reputation of the artist, and its aesthetic appeal, none of which are affected by economic conditions.
As such, it can serve as a shield against the erosive effects of inflation, preserving the wealth of investors even in challenging economic times.
The Border-Crossing Resilience of the Art Market
The art market has shown remarkable resilience (particularly the $1m+ market), even during economic downturns and inflationary periods. “Art is a global asset,” Glenday noted, “…[so] we see that type of behavior in a variety of different regions where we see macroeconomic uncertainty.”
This global nature of the art market allows for the mitigation of macroeconomic pressures in any one region, making it a safe haven for investors during times of economic distress. Furthermore, the demand for art comes from a segment of the population who are especially resilient to GDP or inflation measures over time.
“Art is a global asset. You can buy your painting in New York, you can fly to Hong Kong, sell it there, sell it in London, you can sell it across currencies,” explained Glenday. “That creates a natural mitigation to macroeconomic pressures in any one region.” This international aspect of the art market provides additional layers of security and potential for profit for investors.”
In other words, the demand (and liquidity) of fine art is not correlated to the global stock market as much as some of the other safe-haven assets. Moreover, the appreciation of art is not just a phenomenon observed in the domestic market. It’s a global trend, with art markets around the world witnessing similar patterns.
Art Appreciation in High Inflationary Periods
According to the Masterworks All Art Index, contemporary art prices have appreciated by roughly 17.5% during recent periods of high inflation. This significantly outpaced the S&P 500, and the price appreciation of other assets such as gold, during the same period.
This strong performance of art during inflationary periods underscores its potential as an effective hedge against inflation. On top of this, Nigel Glenday and the rest of the Masterworks team encourage their customers to hold on to their investments for the long term.
As within many sectors, fluctuations can occur over the short term, but you drastically increase your odds of making a stronger profit the longer you hold your investment.
With that said, the Masterworks platform does offer a secondary market that allows peer-to-peer trading for easier access to liquidity. “We guide our investors to thinking about liquidity horizons in terms of the resale of the art at three to ten years,” said Glenday. “But you have two paths to liquidity: you have the resale of the art and then also secondary markets on top of that.”
Final Word
As Glenday pointed out during his recent interview, investing in art can be an effective hedge against inflation due to its scarcity, tangible nature, border-agnostic appeal, resilient demand, and appreciation potential.
However, it’s important to note that art is a long-term investment and should be considered as part of a diversified investment portfolio, and no asset class is completely devoid of risk. With platforms like Masterworks making art investment more accessible, it’s an exciting time for investors looking for innovative ways to hedge their bets and protect their investments.
