In the fall of 2013, activist hedge-fund manager Dan Loeb announced his campaign to remake Sotheby’s, the venerable auction house. The global art market had been booming, nearly doubling in value over the previous decade, thanks to soaring demand for work by contemporary artists. But Loeb—a collector himself—accused Sotheby’s management of failing to capitalize on that surge, disdainfully comparing the auctioneer to “an Old Master painting in desperate need of restoration.”

Loeb’s firm, Third Point, now owns more than 12% of Sotheby’s bid , and at his behest the company has replaced its CEO and overhauled its business model. The good news: Sotheby’s is now a big player in contemporary art, neck-and-neck with privately held rival Christie’s. The bad news: The art market itself is in a tailspin that’s well into its second year.

Starting last summer, stock markets around the globe sputtered, hedge funds lost billions, Russian oil barons retreated, and some of the new money that had driven the global art market to outlandish heights fell by the wayside. Other factors also took off some of the froth, say art experts, including a crackdown on graft in China, money laundering scandals and high-profile lawsuits in the art world. Certainly no market is more susceptible than art to the shifting fortunes and tastes of the global elite, as it became the most speculative high end of financial assets, even less utilitarian than the $100 million Manhattan super-skyscrapers that attract some of the same, often mysterious, buyers.

Global art sales peaked in 2014 at $68.2 billion, according to the European Fine Art Foundation. They fell 7% in 2015, and they’re on pace to drop by double-digit percentages this year. Investors in Sotheby’s, the biggest publicly traded auction house, have suffered in tandem, with the stock tumbling more than 60% from its 2014 highs before a rebound this year.

This summer, another collector started scooping up the stock. Chen Dongsheng, the founder and CEO of China’s Taikang Life Insurance and owner of a Chinese auction house, disclosed in July that he had become Sotheby’s biggest shareholder, with a 13.5% stake, supplanting Loeb. This October and November, when Sotheby’s and its competitors hold major auctions in London and New York, the art world will be watching to see whether Chen bought a masterpiece at a bargain price or overpaid for a gaudy conversation piece—and whether Loeb’s changes at the venerable auctioneer will pay off for investors.

inv-10-01-16-chart-exp

Stock investors will be watching the auctions too, even if they don’t know a Modigliani from a Grandma Moses. Art sales aren’t a direct proxy for the “real” economy. But they correlate strongly with more important indicators, particularly stocks and oil (see the chart above). While researchers disagree about whether art leads or lags other markets, robust sales are a sign that the world’s wealthiest people feel bullish—making a recovering art market something that point-one-percenters and the other 99.9% could be equally excited about.


At the moment, the odds of that happening soon look slim. In an August poll, 87% of the 235 collectors, dealers, art advisors and auction house specialists polled by ArtTactic, a London-based art advisory, said the market would either be flat or go down over the next six months.

That’s due, in large part, to a slump in the postwar and contemporary art that Loeb favors. By 2015, contemporary art accounted for 46% of the market, up from just 17% in 2000. Art is, to put it mildly, an irrational market, where values are a combination of marketing hype, one-upmanship and, in today’s trading market, liquidity. Contemporary art fares well in such an environment because there’s a lot of it, and artists who are still living can create even more. “It offers much more room to create the perception that this market has enormous potential,” says Anders Petterson, founder of ArtTactic.

“One of the reasons [Andy] Warhol is such a valuable artist is that the quantities of it makes it very tradable. There’s an opportunity for a deep market,” one billionaire collector told Fortune, adding that the relative value of contemporary art to the old masters is “mind-blowing.”

Tim Noble and Sue Webster's '$, 2001' sold above estimate for $171,000 in a June 2015 Sotheby's sale in London, as part of an exhibition of pieces inspired by the US Dollar.
Tim Noble and Sue Webster’s ‘$, 2001’ sold above estimate for $171,000 in a June 2015 Sotheby’s sale in London, as part of an exhibition of pieces inspired by the US Dollar.Photo: Mary Turner—Getty Images

 

Now, that category is falling faster than most. Contemporary sales fell almost 50% in value at this spring’s New York and London postwar and contemporary art auctions. “What we saw in the last five years were some ridiculous prices being paid for artists like $10 million-plus for Jeff Koons or $50 million-plus for Andy Warhols,” says Philip Hoffman, a former Christie’s executive and founder and CEO of The Fine Art Group. “When the stock and oil market dried up, those speculators pulled out, so in a sense some of those markets were manipulated in the first place.”

The plunge has hurt Sotheby’s, too. Its auction commissions and fees were down 19% during the first six months of this year, to $355 million, with net income falling 13%. Overall sales volume is down 30%.

Sotheby’s has also cautioned investors that sales for the remainder of the year are likely to be down from last year. “Confidence is a little weaker,” Tad Smith, its CEO since 2015, told Fortune. Including this one, Sotheby’s says there have been six downturns since 1991, most lasting a year or two, as measured by declines in global art sales. Smith was reluctant to say when that might change, but added, “The long-term trend is up,” because “The amount of wealth being created around the world is huge.” Much of the discretionary activities come from new-money buyers who get the “art bug,” he says. “When they have a lot of excess money, they want to spend it on art.”


Sotheby’s is the biggest publicly traded auctioneer in the art world, and its share price reflects the overall malaise. Sotheby’s shares are worth 20% less than the day Loeb first announced his campaign in October of 2013, and about 15% below Loeb’s average purchase price per share of $44.18. Still, they’re up this year from a low of $19, and that may reflect investors’ confidence in some of the changes made under Smith, who was CEO of Madison Square Garden before joining Sotheby’s.

Smith’s lack of expertise in art was frowned on in the clubby collectors’ world, but he’s won respect as an outsider who has shaken things up at a company that was, as Loeb told Fortune, “broken.” A Harvard MBA, Smith also brought business smarts and a congenial manner that can get along with quirky creative types as well as the moneyed elite who are Sotheby’s clients. In other words, his ego isn’t too big for the room.

Smith has helped Sotheby’s tackle its problems with the overuse of price guarantees. Hyper-competition between Sotheby’s and privately held archrival Christie’s led both sellers to promise guaranteed prices to win commissions, a practice that squeezed profit margins. “Financial guarantees were acting like steroids” for prices, says Petterson. The practice hasn’t gone away, but Smith reiterates his promise that Sotheby’s will be “more judicious” about guarantees. He says Sotheby’s is hedging them by either confirming an artwork will sell ahead or time or getting another party to share in the guarantee.

For more on the art market, watch this Fortune video:

Sotheby’s has also moved aggressively into lending to art owners—a promising revenue source when art sales are down. Borrowing against art lets owners extract value from their collections without having to sell low; lenders, meanwhile, can charge rates much higher than those on traditional loans. Sotheby’s financing revenues jumped 20% in the first half of this year to $29.5 million. Over the past four years, its lending has tripled, to $682 million, backed by a $1 billion revolving credit line from J.P. Morgan Chase jpm and HSBC hsbc .

Sotheby’s charges around 600 basis points above Libor, using the art as collateral. But more players are entering the business, which could put downward pressure on margins. The Carlyle Group cg jumped in late last year, and others are in the wings. “We will be entering the financing market and providing relatively inexpensive financing,” says Hoffman, of The Fine Art Group, who says his firm will lend at rates in the “low single digits.”

The lending business has other challenges. Sotheby’s name was dragged into a money laundering scandal of alleged Malaysian embezzler Jho Low, who borrowed $100 million from Sotheby’s in 2014. Sotheby’s has not been accused of anything and has sold all of Low’s paintings that collateralized the loan, according to a spokesperson. While the Low scandal is the biggest, it’s not the only money laundering case to surface in recent years along with the boom. Because of the huge prices paid for art works, and the secrecy with which sales are done, “art is becoming an instrument for that kind of illegal practice,” says Petterson.


As a number of highly respected old-timers left Sotheby’s early this year, Smith put in place new comp agreements that rewarded performance and teamwork. In perhaps his most significant move, in February Sotheby’s completed the purchase of Art Agency Partners—a boutique art advisory firm started by former Christie’s execs—for $85 million, including the five-year earn outs for its principals.

It also obtained the rights to sell the Steven and Ann Ames Collection of contemporary art, with such big postwar art names as Gerhard Richter and Willem De Kooning. That collection will be sold in the New York November auctions. Sotheby’s estimates the sale will bring in more than $100 million, making it the first big coup for the new Art Agency team, headed by former Christie’s exec Amy Cappellazzo, who had been a driver in the expansion of business at Christie’s as co-head of post-war and contemporary art. The Ames estate was also pursued by Christie’s, and in order to secure it, Sotheby’s had to guarantee the estate for $100 million, according to ArtNews. (Sotheby’s has acknowledged the guarantee but declined to comment on its size.)

Another unexpected bright spot has bolstering the auction house’s flagging fortunes this year has been a surprise stronghold: Asian art. Sotheby’s Asian sales gained 16% during the first half of the year, totaling $379.3 million, following a 45% drop in 2015. Much of last year’s Asian downdraft had to do with economic turmoil in China, and with the government’s anti-graft campaign finally targeted the art market, according to the European Fine Art Foundation.

"Liz #1 (Early Colored Liz)," an Andy Warhol painting, sells for $20.3 million during a 2013 auction at Sotheby's in New York. As Sotheby's grapples with a seismic shift in the business of selling art, its largest shareholder, Daniel Loeb, has demanded change claiming the auction house has not adapted quickly enough to the changing market. “Liz #1 (Early Colored Liz),” an Andy Warhol painting, sells for $20.3 million during a 2013 auction at Sotheby’s in New York.Photo: Michelle V. Agins—The New York Times/Redux

The Chinese have a nationalistic bent to their collecting, art experts say, but its art aficionados are finally branching out into the western market. Sotheby’s biggest coup of the year so far has been the sale of contemporary British artist Jenny Saville’s “Shift” for £6.8 million (about $9 million)—triple the estimates—to the founders of the Long Museum in Shanghai.

Now, unless the Chinese economy and stock markets collapse, China is the future, the experts say. “There are perhaps 2,000 billionaires in China right now and only maybe 20 of them are buying serious quality Western art,” says Hoffman. “They are very cultured, very civilized, very interested in art. It’s only a matter of time before they buy many more of the major Western masterpieces.”

And that’s where the addition of Chen Dongsheng to the ranks of Sotheby’s major shareholders adds a little bit of intrigue. If his investment is a sign that China’s elite are regaining confidence in their economy, that could be good news for the art market all around.

A version of this article appears in the October 1, 2016 issue of Fortune with the headline “What’s Good for Sotheby’s Is Good for the World.”