Wealthy Recoup Their Losses
Thursday, June 24, 2010

A new report shows that almost all of the wealth lost by the world's high-net-worth individuals (HNWIs) in 2008 in the height of the financial crisis was recouped in 2009, driven by strong growth in Asia and in emerging markets.

Despite ongoing weakness in the global economy, the 14th annual World Wealth Report, released on June 22 by Merrill Lynch Global Wealth Management and Capgemini, reveals that the world's population of HNWIs returned to 10 million in 2009 as HNWI financial wealth increased, posting a gain of 18.9% to USD39 trillion. Meanwhile, ultra-HNWIs increased their wealth by 21.5% in 2009, indicating that emerging wealth recovery has nearly recouped 2008 losses, returning to levels last seen in 2007.

“The last few years have been significant for wealthy investors. While in 2008 global HNWI wealth showed an unprecedented decline, a year later we are already seeing distinct signs of recovery, and in some areas a complete return to 2007 levels of wealth and growth,” said Nick Tucker, UK and Ireland Market Leader, Merrill Lynch Wealth Management.

“The rebound has been, and will continue to be, driven by emerging markets – especially India and China, as well as Brazil,” said Ed Merchant, Global Head, Capital Markets, Capgemini Financial Services. “In fact, Asia-Pacific was the only region in which both macroeconomic and market drivers of wealth expanded significantly in 2009.”

While the global HNWI recovery was generally stronger in developing nations, the report concludes that most of the world’s HNWI population and wealth remained highly concentrated in the US, Japan and Germany, which together accounted for 53.5% of the world’s HNWI population in 2009, down slightly from 54% in 2008. North America remains the single largest home to HNWIs, with its 3.1 million HNWIs accounting for 31% of the global HNWI population.

After falling 14.2% in 2008 to 2.4 million, Asia-Pacific’s HNWI population rebounded in 2009 to reach 3 million, matching that of Europe’s HNWI population for the first time, the report shows. Asia-Pacific wealth also surged 30.9% to USD9.7 trillion, more than erasing 2008 losses and surpassing the USD9.5 trillion in wealth held by Europe’s HNWIs. This shift in rankings, according to the report, occurred because HNWI gains in Europe, while sizeable, were far less than those in Asia-Pacific, which saw continued robust growth in both economic and market drivers of wealth. Hong Kong and India led growth in Asia-Pacific, after experiencing massive declines in their HNWI bases and wealth in 2008.

Merrill Lynch/Capgemini expects that the 'BRIC' nations (Brazil, Russia, India and China) will again be the drivers of HNWI growth for their respective regions in the coming years. In Asia-Pacific, China and India will continue to lead the way, with economic expansion and HNWI growth likely to keep outpacing more developed economies. Asia-Pacific HNWI growth is likely to be the fastest in the world as a result. In Latin America, Brazil is similarly expected to remain an engine of growth. Russia is expected to display strength due to its commodity-rich resource base.

After falling 26% in 2008 to 362,000, the HNWI population in the UK rose 23.8% to 448,000 in 2009. However this was still below the peak of 495,000 reached in 2007. The report observes that the 2009 increase was principally driven by a powerful 49.5% rise in UK stock market capitalization, base rates falling from 2% in January 2009 to 0.5% in April 2009 and a slight increase (+1.25%) in house prices. The increase came despite contraction of the UK economy (GDP fell 5%); lower exports (down 23.5% on 2008) and industrial production 10.2% below 2008.

The report goes on to suggest that HNWI investors favoured predictable returns and cash flow, as evidenced by the rise in HNWI allocations to fixed-income instruments, to 31% from 29%. Equity holdings also rose, to 29% from 25%, as the world’s stock markets recovered. Cash holdings declined slightly. HNWIs from Latin America and Japan remained the most conservative, with HWNIs in each region holding 52% of their aggregate portfolios in either cash/deposits or fixed-income, despite surging equities prices.

Investments in residential real estate regained some of its appeal in 2009, the report notes, as HNWIs showed a preference for tangible assets and sought to capture some bargains as real estate prices slumped. Of all real estate assets, the share dedicated to residential real estate rose to 48% from 45% as prices recovered across much of the globe. Commercial real estate holdings, however, dipped slightly to 27% from 28% as the sector experienced falling rental incomes, weak demand and increased supply.

The report predicts that by 2011, HNWIs will reduce investments in their home regions and look to those regions in which growth is expected to be more robust. While HNWIs from the mature economic regions of North America and Europe are expected to continue increasing their allocations to Asia-Pacific in search of higher returns, HNWIs in Europe are also likely to increase their North American holdings to inject stability into their portfolios.

“These asset allocation findings tell us that despite signs of recovery and growth, HNWIs’ confidence was shaken by the financial crisis and they are taking a more balanced approach to investing and risk-taking, preferring more reliable and consistent returns,” added Tucker.

“To best serve the more cautious investor, wealth management firms need to clearly identify and factor in behavioural traits when providing specialized and independent advice, and for effective portfolio and risk management over the long-term," he concluded.