Art as an Alternative Frontier Market Investment


How Cuba Changed Our Mindset On Ways To Invest In Frontier Markets

We were recently in Cuba to take a firsthand look at the island nation. In a socialist country with a tightly controlled currency, closed off property market, and shuttered stock market, the options for investment seemed non-existent.

That is until we visited the Main Arts & Craft Market in Havana, at the old San Jose warehouses. We went there expecting it to be the usual tourist trap, and indeed we found the usual souvenir nick-knacks along with paintings that were probably made in an assembly line.

But we also saw original and contemporary art there, including many that caught our eye. The creativity and talent on display surprised us, and prices were extremely reasonable but cash only. There were also more professional art galleries in the city, but as a whole communism had done little to dent the creative output of Cuba.

For Some Frontier Markets, Art May Be The Best (or Only) Way To Invest

That is when we considered the potential investment thesis for Cuban art.

The market had been restricted to American buyers, and prices were very reasonable as a result. We were also quite optimistic about Cuba’s future, and had read about how emerging market art markets had taken off as the super wealthy in those countries sought out art from their own cultures. Finally, there was already a relatively wealthy diaspora of Cubans in America, who despite their opinion of Castro would be an easy source of demand for Cuban art as the market opened up. Finally, the art was beautiful and even if the art market never took off, the aesthetic benefits would be worth it at the offered prices.

Upon further research, we weren’t the first ones to think about this. When news of Obama’s decision came out, both Bloomberg and the NY Times wrote articles about the potential of the Cuban art market. In lieu of a property or stock market, art could be one of the only ways for people to “invest” in Cuban assets, and actually hold the asset outside of Cuba.

But was there precedence for art from less developed markets appreciating in value?

Emerging Market Art Has Boomed

Emerging market art has boomed in popularity over the past decade, with auction houses focusing on the BRICs. Chinese art has been the standout, but Indian art prices have also soared. What is amazing is how recent the price boom has been, with Middle Eastern art starting to jump in 2005 and Turkish, Indian, and Chinese art really booming from 2008. From 2008 to 2011, Chinese art values grew by 500% (!), but cooled in 2012.

The caveat is that it’s probably no coincidence that the rise of emerging market art coincides with QE in the US, which led to asset values to rise globally. It also coincides with a run of lackluster returns in emerging market equities, making hard assets seem even more attractive.

Another caveat was that there was a strong focus in Chinese art for traditional works, including calligraphy and cultural artifacts. Contemporary art made up less than 10% of sales, and remained priced below similar work from developed markets. Since investing in an art market usually involves contemporary works rather than ancient art, the fact that even in China’s booming art market, contemporary art lagged, art as an asset class may not be as attractive as the headlines would suggest.

What Conditions Make Frontier Art Markets Attractive?

Despite these concerns, there is no arguing that art values have rocketed higher in the past 10 years. But what are some factors that contribute to making an attractive frontier market from an art investment perspective?

1. Growing population of wealthy and elite

This is an obvious condition since art remains in the purview of the rich and upper class, although a growing middle class would benefit local art markets as well. A larger population helps to create more demand. This makes the Chinese art market attractive with almost 3.8 million, millionaire households (without even including the Chinese diaspora), versus say Estonia which is home to under 1000 millionaire households.

2. Illiquid or volatile local currency

Part of the appeal of art is as a physical asset that is relatively easy to transport. In markets where the currency is heavily controlled, art can counter-intuitively be a more liquid way to move assets. For example in China, art had become a preferred method of bribery since currency controls are strict and cash is in small denominations. This also makes art an almost safe-haven type asset, especially in countries with very unstable currencies.

3. Support from international galleries and auction houses

Art sales are still largely driven by big-name art galleries and auction houses. If art insiders are christening a certain country as home to the next big art scene, it can become a self-fulfilling prophesy. However, a country needs to have a vibrant enough art scene to justify art insiders’ interest in it.

What Frontier Art Markets Look Interesting?

Note that most high-growth frontier markets with decent sized populations fulfill the first two conditions.

Cuba was a country that fulfilled those 3 conditions and that we thought looked interesting. But Cuba is also relatively small and unheralded in the global art world for now.

We can also look at other countries without stock exchanges, which therefore have limited avenues for investment. Aside from Cuba, Angola looks like an interesting prospect given its size and relative wealth. Ethiopia is also interesting despite its low level of economic development. This is because the population is huge, and there is also a large, relatively wealthy diaspora around the globe.

In fact, Africa is a continent that seems to be coming into its own, led by the growth of the Nigerian art market. According to this Bloomberg article, the art market has also boomed since 2008 with average prices jumping 500% in that time. The market remains small so African art can still be considered on the frontier for now, possibly worth a second look for prospective art collectors. You can read more about it on an artnet article here.

Final Thoughts

Buying art is a very personal process, and the caveat that you should never buy art just as an investment should be followed. Headlines proclaiming record highs for art should be taken with a grain of salt, but the recent performance for emerging market art can be compelling. In frontier markets, fine art may be the only way to gain exposure to that country. At the very least, your investment would make your home or office a lot nicer, which may in itself provide a better return than stocks or bonds in light of recent market moves.

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