Art Market Appears on Strong, if Cautious, Footing After London Sales

Major auctions in London this week are proving the art market is in solid health at the start of 2023, yet high interest rates and inflation in addition to the war in Ukraine continue to keep enthusiasm in check.

Overall, more than 90% of the lots were sold at combined evening sales of modern, contemporary, and ultra-contemporary work at Christie’s and Sotheby’s, while Phillips evening sale was 100% sold. Those are unquestionably good results.

But there are signs throughout the market that consignors and collectors are holding back a bit, says Drew Watson, head of art services at Bank of America Private Bank.

“The sales were fairly solid, but there was kind of a lack of major headliners,” Watson says. “We’re seeing some increased conservatism among the collector base. There’s more of an emphasis on people looking at established categories like modern masters, blue-chip post-war, [and] Surrealism.”

A dedicated evening sale at Christie’s focused on Surrealism did well, for instance, realizing nearly £39 million (nearly US$47 million) with 30 of 32 lots sold. Sotheby’s will hold a dedicated Surrealist sale on March 15 in Paris.

But works by young contemporary, often female, artists continued to attract interest all week. At Phillips, “it was the cutting-edge woman artists who stole the show this evening,” Olivia Thornton, head of 20th-century and contemporary art, Europe, said at a news conference following an evening sale on Thursday.

Most notable among these artists at Phillips was Caroline Walker, whose large-scale work Threshold, painted in 2014, generated consistent back-and-forth volleying for more than 11 minutes. It eventually sold to a bidder in the sale room for a hammer price of £730,000, £927,100 with fees—a record for the artist.

Other records were achieved by Sarah Ball, whose Elliot, sold for £120,600, with fees, above an £80,000 high estimate, and by Angela Heisch, whose Egg White Blue sold for £76,200, above a £30,000 high estimate.

The results followed strong bidding for female artists at Christie’s earlier in the week, which included the previously minted record for Walker of £693,000 for The Puppeteer. Cristina Banban’s La Fatiga Que Me das (You Exhaust me) also achieved a record, selling for £163,800, above a high estimate of £70,000, and Michaela Yearwood-Dan’s Love me nots achieved £730,800, far above a £60,000 high estimate.

But also at Phillips, a dynamic canvas by Gerhard Richter offered by French collector Marcel Brient for between £10 million and £15 million, was withdrawn at the last minute. Although the work “generated interest from collectors,” it was not at a level that met Brient’s expectations, and so he “was not prepared to let it go,” Cheyenne Westphal, Phillips chairman, said at a press briefing after the sale.

The absence of the Richter resulted in a dramatically different overall auction total of £20.3 million for Phillips. The revised estimate for the 23 remaining works was between £15.8 million and £22.2 million.

Another work offered by Brient, an untitled late work by Willem de Kooning from 1984, sold for a hammer price of £5 million, £6 million with fees, below the presale low estimate of £7 million.

While the froth may be out of the market at the moment, there is some cautious optimism of the future, with a handful of single-owner collections anticipated for May. Already announced at Sotheby’s is a group of works to be offered by Jan Shrem and Maria Manetti Shrem of San Francisco, including a major work by Pablo Piccaso, in addition to the Erving and Joyce Wolf Family Collection of decorative and fine arts. Christie’s, meanwhile, will be selling 16 modern and post-war paintings from the collection of S.I. Newhouse that could realise more than US$144 million.

“We’re only going to see more as we get closer to those sales,” Watson says. It’s a sign, he adds, of “cautious optimism for the higher end of the market in New York.”

Buyers, however, remain more conservative, as was evident with some of the major works offered this week, such as Lucian Freud’s portrait, Ib Reading, 1997, which sold for £17 million, within expectations, at Sotheby’s. They are willing to buy, but at the right price.

“Buyers are pretty savvy, especially at the high end, and will kind of expect a bit of a discount” considering current macroeconomic and geopolitical conditions, Watson says. As a result, auction houses will need to be disciplined in how they price works. “It’s not really a market where you want to push estimates,” he says.

One notable shift this week was renewed active bidding from buyers in Asia, Watson says.

At Christie’s, a bidding war between collectors in Japan and Singapore for a painting by Shara Hughes, Rough Terrain, ended in the hands of the collector from Singapore who placed a bid of £500,000, well above the £300,000 high estimate. Overall, 13% of bidders were from Asia during Christie’s evening sale of 20th- and 21st-century art and a separate sale of Surrealist works.

Sotheby’s, meanwhile, credited “deep bidding” from Asia for driving results at its evening sales, with several of these collectors noted as the “underbidder.” Over half the lots in Sotheby’s The Now sale of ultra-contemporary works received bids from Asia, while Asian buyers secured Barbara Kruger’s Untitled (Out of your mind… In your face), 1989, which realised £889,000, above a high estimate, and Andy Warhol’s portrait of Debbie Harry, which realized £6.9 million, also above a high estimate, after spirited bidding in both instances.

An Asian buyer also bought Richter’s Abstraktes Bild, 1986, at Sotheby’s, in another active bidding round. The final price, with fees, was £24.2 million.

At Phillips, the last two lots attracted several online bids from China, although the paintings—Ball’s Elliot, and Danica Lundy’s Bonefire—went to a collector bidding via a specialist on the phone and to a Canadian online bidder, respectively.

Whether the results in London portend the future for the art market this year remains to be seen. It may be best at this point to consider a post-sale press conference comment from Phillips CEO Stephen Brooks, who said, “It’s difficult to draw conclusions from one week of sales.”

After years in the doldrums, European banks have cleaned up their balance sheets, cut costs and started earning more on loans.

The result: Stock prices have surged and lenders are preparing to hand back some $130 billion to shareholders this year. Even dealmaking within the sector, long a taboo topic, is back, with BBVA of Spain resurrecting an approach for smaller rival Sabadell .

The resurgence is enriching a small group of hedge funds and others who started building contrarian bets on European lenders when they were out of favour. Beneficiaries include hedge-fund firms such as Basswood Capital Management and so-called value investors such as Pzena Investment Management and Smead Capital Management.

It is also bringing in new investors, enticed by still-depressed share prices and promising payouts.

“There’s still a lot of juice left to squeeze,” said Bennett Lindenbaum, co-founder of Basswood, a hedge-fund firm based in New York that focuses on the financial sector.

Basswood began accumulating positions around 2018. European banks were plagued by issues including political turmoil in Italy and money-laundering scandals . Meanwhile, negative interest rates had hammered profits.

Still, Basswood’s team figured valuations were cheap, lenders had shored up capital and interest rates wouldn’t stay negative forever. The firm set up a European office and scooped up stock in banks such as Deutsche Bank , UniCredit and BNP Paribas .

Fast forward to 2024, and European banking stocks are largely beating big U.S. banks this year. Shares in many, such as Germany’s largest lender Deutsche Bank , have hit multiyear highs .

A long-only version of Basswood’s European banks and financials strategy—which doesn’t bet on stocks falling—has returned approximately 18% on an annualised basis since it was launched in 2021, before fees and expenses, Lindenbaum said.

The industry’s turnaround reflects years spent cutting costs and jettisoning bad loans, plus tougher operating rules that lifted capital levels. That meant banks were primed to profit when benchmark interest rates turned positive in 2022.

On a key measure of profitability, return on equity, the continent’s 20 largest banks overtook U.S. counterparts last year for the first time in more than a decade, Deutsche Bank analysts say.

Reflecting their improved health, European banks could spend almost as much as 120 billion euros, or nearly $130 billion, on dividends and share buybacks this year, according to Bank of America analysts.

If bank mergers pick up, that could mean takeover offers at big premiums for investors in smaller lenders. European banks were so weak for so long, dealmaking stalled. Acquisitive larger banks like BBVA could reap the rewards of greater scale and cost efficiencies, assuming they don’t overpay.

“European banks, in general, are cheaper, better capitalised, more profitable and more shareholder friendly than they have been in many years. It’s not surprising there’s a lot of new investor interest in identifying the winners in the sector,” said Gustav Moss, a partner at the activist investor Cevian Capital, which has backed institutions including UBS .

As central banks move to cut interest rates, bumper profits could recede, but policy rates aren’t likely to return to the negative levels banks endured for almost a decade. Stock prices remain modest too, with most far below the book value of their assets.

Among the biggest winners are investors in UniCredit . Shares in the Italian lender have more than quadrupled since Andrea Orcel became chief executive in 2021, reaching their highest levels in more than a decade.

Under the former UBS banker, UniCredit has boosted earnings and started handing large sums back to shareholders , after convincing the European Central Bank the business was strong enough to make large payouts.

Orcel said European banks are increasingly attracting investors like hedge funds with a long-term view, and with more varied portfolios, like pension funds.

He said that investor-relations staff initially advised him that visiting U.S. investors was important to build relationships—but wasn’t likely to bear fruit, given how they viewed European banks. “Now Americans ask you for meetings,” Orcel said.

UniCredit is the second-largest position in Phoenix-based Smead Capital’s $126 million international value fund. It started investing in August 2022, when UniCredit shares traded around €10. They now trade at about €35.

Cole Smead , the firm’s chief executive, said the stock has further to run, partly because UniCredit can now consider buying rivals on the cheap.

Sentiment has shifted so much that for some investors, who figure the biggest profits are to be made betting against the consensus, it might even be time to pull back. A recent Bank of America survey found regional investors had warmed to European banks, with 52% of respondents judging the sector attractive.

And while bets on banks are now paying off, trying to bottom-fish in European banking stocks has burned plenty of investors over the past decade. Investments have tied up money that could have made far greater returns elsewhere.

Deutsche Bank, for instance, underwent years of scandals and big losses before stabilising under Chief Executive Christian Sewing . Rewarding shareholders, he said, is now the bank’s priority.

U.S. private-equity firm Cerberus Capital Management built stakes in Deutsche Bank and domestic rival Commerzbank in 2017, only to sell a chunk when shares were down in 2022. The investor struggled to make changes at Commerzbank.

A Cerberus spokesman said it remains “bullish and committed to the sector,” with bank investments in Poland and France. It retains shares in both Deutsche and Commerzbank, and is an investor in another German lender, the unlisted Hamburg Commercial Bank.

Similarly, Capital Group also invested in both Deutsche Bank and Commerzbank, only to sell roughly 5% stakes in both banks in 2022—at far below where they now trade. Last month, Capital Group disclosed buying shares again in Deutsche Bank, lifting its holding above 3%. A spokeswoman declined to comment.

U.S.-based Pzena, which manages some $64 billion in assets, has backed banks such as UBS and U.K.-listed HSBC , NatWest and Barclays .

Pzena reckoned balance sheets, capital positions and profitability would all eventually improve, either through higher interest rates or as business models shifted. Still, some changes took longer than expected. “I don’t think anyone would have thought the ECB would keep rates negative for eight or nine years,” said portfolio manager Miklos Vasarhelyi.

Some Pzena investments date as far back as 2009 and 2010, Vasarhelyi said. “We’ve been waiting for this to turn for a long time.”

Art Market Appears on Strong, if Cautious, Footing After London Sales

Shares in European banks such as UniCredit have been on a tear