Michael Plummer participated in a Wall Street Journal roundtable on art investing where he contributed this novel analysis of art’s correlation to demand for capital:
We think it is better to look at returns on art coming about from variances in demand for capital. Except in times of market dislocation, art is not correlated with equities markets, and to some extent tends to languish when the global economy is expanding and the demand for capital for investment in corporate infrastructure is high.
For example, as the global economy exploded in the 1990s as Russia, China, India and other countries fully joined the global economy, art prices and returns were low to nonexistent. If you think about who collects art, this makes sense. Most art collectors are entrepreneurs, or investors who make money not from their art but the businesses they invest in. Thus, when economies are growing, they need to grow their wealth through investing in the things that provide them with income.
Exactly how does this translate into recent art market returns? First, the boom from 2003 to 2008 was driven by new money—think Russian plutocrats and Chinese millionaires—looking for a place to invest and spend after the enormous gains from the late ’90s.
Then, between late 2008 and early 2010, the art market had a serious liquidity crunch because capital was being pulled out of it as global markets deleveraged.
From 2010 to 2012, the art market boomed, and returns were high, as capital had nowhere else to invest, the euro was considered no longer a safe currency, and, in general, there was diminished confidence in financial investments.
From 2012 onward, as the global economy has started to recover more fully, the art market has cooled, except in the contemporary sector. I believe that, minus any sort of global shock, if the global economy continues to warm up again, capital will start to flow back into investments there and not into art, thus, in many ways, damping art investment returns over the next five years or so.
How to Invest in Art (WSJ)