Driven by market capitalisation growth in emerging economies, the wealth of the world’s high net worth individuals (HNWIs) increased 9.4 percent to US$40.7 trillion in 2007, according to the 12th annual World Wealth Report, released today by Merrill Lynch (NYSE: MER) and Capgemini.
India led the world in HNWI population growth at 22.7 percent, driven by market capitalisation growth of 118 percent and real GDP growth of 7.9 percent. Although India’s real GDP growth decelerated from 9.4 percent in 2006, current levels are considered more stable and sustainable. India’s two largest exchanges – the Bombay Stock Exchange and the National Stock Exchange – ranked among the world’s top 12 exchanges by end of 2007, boosted by initial public offering markets and heightened international interest.
China experienced the second largest expansion of their HNWI population, advancing 20.3 percent – an increase fueled by market capitalisation growth of 291 percent and real GDP growth of 11.4 percent. Significant price increases and strong IPO activity propelled the Shanghai Exchange to become the sixth largest exchange in the world in terms of market capitalisation.
But while market capitalisation and real GDP growth rates were higher in China than India, the HNWI population of India grew faster in 2007. The Report suggests that as market capitalisation and real GDP in China were spread over a larger population, there were smaller per capita gains in China. In 2006, India had a larger market capitalisation growth than gross national income, significantly impacting HNWI population growth in India. In addition, China is currently experiencing explosive growth in its “mass affluent” population, which has yet to break the HNWI threshold of US$1 million.
Brazil enjoyed the third-highest HNWI growth rate in 2007, with a 19.1 percent increase, spurred by a wave of robust market capitalisation growth of 93 percent and real GDP growth of 5.1 percent. Net private capital flows to Latin America doubled in 2007, contributing to the Brazilian Stock Exchange’s fourth place ranking among the world’s largest IPO markets and 7.2 percent market share gain. This, according to the Report, lent support to the establishment and global integration of the Brazilian financial system.
Russia was home to one of the world’s 10 fastest-growing HNWI populations, despite growth deceleration from 15.5 percent in 2006 to 14.4 percent in 2007. Solid gains of 37.6 percent in market capitalisation and 7.4 percent in real GDP represented the growing international interest in the country as a global player, suggesting that the ongoing development of Russia’s external relationships will likely improve the economy’s fundamentals.
Green investing has become widely popular across the globe in recent years, offering investors lucrative returns and an opportunity to become actively involved in social responsibility. An array of vehicles through which to back green initiatives drove robust growth in green sectors in 2007, such as mutual funds, ETFs and other pooled products, or alternative investments. The total investment in clean technology, for example, increased to US$117 billion in 2007, up 41 percent from 2005, with notable strength in wind and solar.
The Middle East and Europe were the most environmentally attuned HNWI and Ultra-HNWI populations, with participation ranging from around 17 percent to 21 percent in 2007. In comparison, only 5 percent of HNWIs and 7 percent of Ultra-HNWIs in North America allocated part of their portfolio holdings to green investing. North America was also the only region in which social responsibility was the primary driver of HNWIs’ green investing. Among HNWIs worldwide, approximately half pointed to financial returns as the primary reason for their allocation to green investing.
Impressive growth of emerging economies was boosted by thriving exports and heightened domestic demand. The largest regional growth of the HNWI population occurred in the Middle East, Eastern Europe, and Latin America, with increases of 15.6 percent, 14.3 percent, and 12.2 percent, respectively. Gains in commodity exports, paired with growing international acceptance of emerging financial centres as significant global players, contributed to the growth rates of emerging economies.
The BRIC nations (Brazil, Russia, India and China) continued to play pivotal roles in the global economy in 2007, driven by impressive economic gains and robust market capitalisation growth.
“This year’s Report found that the number of high net worth individuals, and the amount of wealth they control, continued to increase in 2007, with the greatest wealth being created in the emerging markets of India, China, and Brazil,” said Nick Tucker. “While trends indicate opportunities exist for wealth management firms to tap into new growth markets, success will go to those that recognise their existing service, delivery and technology strategies must be adapted and tailored to meet the particular needs of these growth markets.”
With a significant portion of HNWI wealth invested in stock markets, market capitalisation performance is an important determinant of HNWI wealth generation. While traditional United States, European, and Asian stock market indexes experienced moderate growth, many emerging markets extended winning streaks of robust gains. Various Dow Jones Market Indexes, for example, had moderate returns in 2007, averaging 6.8 percent, far below the 17.3 percent average in 2006, and compared to 2006, market gains in 2007 failed to have as positive an impact on HNWI wealth generation.
Most major European and Asian indexes were contained to low single-digit growth; the world’s worst performer, the Nikkei 225, contracted 11.1 percent, while Europe’s best performer, the German DAX, was the only major traditional index to outpace its 2006 performance and sustain double-digit growth.
Fueled mostly by organic price increases, the Shanghai and the Shenzhen Stock Exchanges grew at 303 percent and 244 percent, respectively. India’s Bombay Exchange and National Stock Exchange had respective growth rates of 122 percent and 115 percent.
“The divide between market capitalisation growth in mature and emerging economies was significantly more pronounced in 2007 than in previous years,” said Chris Gant, Head of Wealth Management, Capgemini Financial Services UK. “Despite slowdowns in the growth of traditional stock exchanges and significant market volatility, several emerging market exchanges experienced robust gains in 2007, further accelerating global wealth.”
Emerging markets made significant contributions to record-level worldwide IPO activity in 2007. More than 1,300 IPOs raised about US$300 billion during the year—and emerging markets captured 7 of the top 10 issues. The BRIC nations exhibited particular strength in the area, accounting for 39 percent of global IPO volume in 2007, up from 32 percent in 2006.
Net private capital flows to emerging markets also increased in 2007. China attracted the largest absolute amount of private capital in 2007 at a country level, drawing in about US$55 billion. Emerging Europe was the most popular regional destination, attracting US$276 billion. Emerging Asia experienced a 20 percent drop in private capital flows, reflecting, in part, that equity flows helped policymakers accumulate foreign exchange reserves, which reached roughly US$1 trillion in China alone. Private capital flows to Latin America, however, more than doubled to US$106 billion in 2007.
Overall, hedge funds performed well in 2007 with average gains reaching 12.6 percent, down only slightly from 2006. Hedge fund returns outperformed traditional stock indexes in 2007, boosted by 20.3 percent average gains in emerging markets. In recent years, an increasing proportion of hedge fund assets have come from institutional investors, versus wealthy clients, shifting the main driver of the industry’s growth.
Fueled largely by the growth of capital-intensive sectors, venture capitalist fundraising and investing in 2007 reached their highest levels since 2001. New opportunities in life sciences and clean technologies expanded market opportunities and the renewable energy sector hosted a record IPO issuance last year led by the US$6.5 billion IPO of a Spanish utilities group and the US$1.2 billion IPO of a Brazilian sugar and ethanol producer. Total investment in clean technology increased 35 percent, boosted by numerous clean technology benchmark indexes gaining more than 50 percent for the year.
Effects from the downturn in the United States economy weighed on other mature economies – as evident by slowed GDP growth and weak equity market performances in parts of Europe and Asia – and were fueled by three main factors: a cooling housing market, tightened credit availability, and greater volatility and price declines in equity markets. This chain of events impacted both consumers and institutions, impeding their ability to maintain liquidity and operate businesses.
In line with housing market downturns, REIT indexes incurred significant losses globally – in marked contrast to robust gains in 2006. Worldwide equity market performances proved the divergence between mature and emerging markets – the MSCI Global Indexes recorded 0.1 percent and 3.2 percent contractions in Europe and the United States, respectively, in the second half of the year, versus gains of 10.4 percent and 6.3 percent in the first half. The Emerging Market MSCI Global Indexes excelled – led by Latin America in the beginning of the year and the BRIC nations in the second half. Equity market losses in mature economies reverberated throughout international credit markets in the second half of 2007. The economic slowdown in the United States drove a severe depreciation of the U.S. dollar against most major currencies worldwide – the dollar fell 10.5 percent, 15.8 percent, and 17 percent, respectively, relative to the euro, the Canadian dollar, and the Brazilian real.
Since the close of 2007, economic indicators in the United States have deteriorated further; notably: slowing consumer spending, cooling housing markets and softening labor market conditions. A flurry of developments in international credit and equity markets, all stemming from the United States’ economic slowdown, shaped the opening months of 2008. Early on, greater downside risks to growth in the United States, along with the far-reaching implications of tightening international credit markets, weighed heavily on equity markets around the globe. By mid-January, losses incurred in virtually all geographic markets exceeded 10 percent.[3] However, mature markets have stabilised somewhat, bringing average 2008 losses down to roughly 4 percent, and emerging markets have actually reclaimed and exceeded incurred losses, generating an average net gain by mid-April.[4]
The diverging macroeconomic environments at either end of 2007 helped define HNWIs’ asset allocation strategies. Building on the optimism of 2006, the early months of 2007 showed HNWIs betting heavily on riskier asset classes. But as the year wore on, and financial market turmoil and economic uncertainty intensified, HNWIs began to retrench, shifting their investments to safer, less volatile asset classes.
The Report found that cash/deposits and fixed income securities accounted for 44 percent of HNWI financial assets, up 9 percentage points from 2006. Fixed income securities saw a 6 percentage point increase in asset allocation, accounting for 27 percent of holdings, up from 21 percent in 2006.
Globally, HNWIs continued to decrease their holdings in North America and showed greater interest in domestic market investments, preferring more familiar ground amid heightened levels of economic uncertainty.
Despite heightened uncertainty regarding the near-term global outlook, still-strong fundamentals in emerging markets are likely to sustain high levels of growth. The balance between emerging market strength and mature market recovery will likely persist through 2008, with the short-term outlook subject to variability given that aspects of potential risk may still be unknown.
By and large, the global economy has two distinctive obstacles to overcome: inhibitors to growth in mature markets and high risks of inflation in emerging markets. How well these challenges are met will shape global HNWI growth prospects going forward. Given 2007 performances and taking into consideration recent developments in world markets, the Report suggests that global HNWI wealth will grow to US$59.1 trillion by 2012, advancing at a rate of 7.7 percent per year.
