Aaron Grunwald: What impact could the current inflationary environment potentially have on the art market? Generally speaking, is inflation positive or negative for the art market? 

Aymeric Thuault: Many economic studies have highlighted the outperformance of art versus all other asset classes in an inflationary context, whether the economy is growing strongly or stagnating, stagflation. Unfortunately these studies are all based on old data, as there has been little inflation over the last two decades. In the meantime, the art market has changed fundamentally as two new generations of international collectors have emerged during that period, transforming the art market in a radical way and making it more resilient than before. Furthermore, the current economic context and the huge amount of money printing issued by central banks over the last two years makes the situation very unique. 

Thus past observations need to be taken with caution, as the current circumstances are quite unprecedented.

That said, the high-end and ultra-high-end of the market--above $10m--have shown exceptional results and a huge increase in liquidity over the last year, as seasoned collectors continue to consider high-end quality artworks as a store of value in times of economic uncertainty and looming inflation.

Similarly, we have seen sustained interest from our clients and new market entrants, as they seek to diversify their wealth using art as a hedge against inflation.

Does inflation change how art deals are financed?

As an art lender, inflation has pushed us to provide financing with floating rates. We do not provide loans anymore with fixed interest rates, since the beginning of the year, which means borrowers, who leverage their art, could now be more exposed to continuous interest rate increases. 

Are you concerned about an economic slowdown hitting the art market, both in the near-term or perhaps on a delayed basis? Does fear of recession play a role in the art market?

Historically, there has always been a delay in the art market reaction to economic downturns and brutal corrections on traditional assets classes. As an example, in May 2008, the art market was still running hot, but cooled down massively towards the end of the year and in early 2009. Whether there will be a full-blown recession or not, it is important to acknowledge that liquidity dynamics are reversing fast and we are just starting to see how the increasing cost of money will impact the real economy and various asset classes. If capital becomes more expensive, then spending priorities are bound to change.

The first half of the year was marked by a frenzied demand for young upcoming artists, with a focus on female artists and artists of colour. There were some extreme price increases and exuberant bidding that has become disconnected to art-historical relevance for a surprisingly large number of ultra-contemporary artists.

Clearly this segment is at risk of a steep correction, similarly to what we observed in financial markets for overblown, speculative stocks.

Furthermore, millennials, who had outspent all other generations in 2021 and had been a driving force behind the speculative capital that chased ultra-contemporary art, might now face steep valuation corrections on the asset classes, after years of persistent price appreciation.

Modern and post-war art, on the other hand, are far more shielded from corrections, especially works created by artists of historical relevance, that demonstrate a scarcity and an international recognition that allows a potential sale in various geographic locations. On the contrary, collectors tend to consider quality works from these periods as stores of value.

What impact could rising interest rates potentially have on the art market?

Rather than considering the impact of interest rates on the art market, it makes more sense to think about real interest rates. Studies based on past observation show that periods of low real interest rates have often coincided with rising art prices.

Indeed, art does not pay a dividend or generate any income stream, but just ‘consumes’ revenue due to insurance, storage and maintenance costs. Thus, it is really at times when real interest rates are rising that the opportunity cost of owning art is higher. Furthermore, the incentive for art owners to switch to interest-bearing investments also becomes more relevant in times of rising real interest rates.

Given the current context, negative real rates are bound to stay for quite some time, which should remain overall supportive for art prices. Of course, I am discounting the speculative sections of the market.

What role do Luxembourg firms play in the art lending market?

We are the only art lenders in Luxembourg. Our basic service is to provide liquidity to private collectors based in various European jurisdictions. As our loans are ‘non-recourse’ that means that their risk is purely limited to this art in case of a default.

Usually the funds will be re-invested in new art acquisitions, especially in the post-war and contemporary art segments, but some of our clients also use these loans to address temporary liquidity needs in their own ventures.

The European art lending market is still nascent, compared to the US art lending market, but an increasing number of collectors are discovering these financing facilities, as it allows them to take advantage of the price appreciation of artworks without having to resort to an outright sale.

A version of this interview originally appeared in Delano’s October 2022