Population of high net worth individuals up 7% in Mideast

The UAE is expected to witness a continual and sustained recovery even as the number of its High Net Worth Individuals (HNWIs) declined to 54,500 in 2009.

The HNWI population in the Middle East returned to pre-crisis levels at 400,000 and rose by 7.1 per cent with these individuals controlling $1.5 trillion (Dh5.5trn) of financial wealth, up from $1.4trn in 2008, according to the annual World Wealth Report by Merrill Lynch Global Wealth Management and Capgemini.

Globally, the super-rich regained ground in spite of weakness in the global economy and their population returned to 10 million in 2009, whereas their wealth rose by 18.9 per cent to $39trn. These figures indicate that emerging wealth recovery has nearly recouped 2008 losses, according to the report.

"We are expecting a continued sustained growth in the UAE next year. Debt re-structuring being embarked upon is moving well ahead of time. Now when that happens, you will see GDP growth to continue in the local economies and we expect that wealth would also grow here," Amir Sadr, Head of Middle East, Merrill Lynch Wealth Management, told Emirates Business.

"We are not forecasting the number of HNWIs but we are forecasting a growth, a continued growth in the economy, though fragile," he said. HNWIs are defined as those having investible assets of $1 million or more, excluding primary residence, collectibles, consumables and consumer durables. Ultra HNWIs (UHNWIs) are those having investible assets of $30m or more.

Cash to use

The year saw HNWIs reducing their holdings in cash/deposits as the allocation to fixed income increased. While Middle East saw allocations in real estate decline from 25 per cent in 2008 to 23 per cent in 2009, the allocations in fixed income were 25 per cent.

Going further, "in 2010, we expect real estate outside the region, primarily in the United Kingdom and Europe, and investments that have yield like fixed-income investments, commercial real estate that has an income flow coming in, some structures with income high on preference in this region, including the UAE. There would be less allocation to equities and less to cash," said Sadr.

As HNWIs cautiously re-entered the financial markets after the crises, they also returned to passion investments. Art and other collectibles such as coins, antiques were the most attractive to these "investor-collectors" – allocation to luxury collectibles grew to 30 per cent in 2009.

Demand for passion investments overall is likely to increase in 2010 as wealth levels rebound, evidenced by the fact that auction houses, luxury goods makers and high-end service providers all reported signs of renewed demand towards the end of 2009, and in the early part of 2010.

Demand for philanthropic giving and philanthropic offerings is also growing, according to the report.

Resilient region

The Middle East had 400,000 HNWIs at the end of 2009, of which 3,600 were UHNWIs.

The region saw a 7.1 per cent increase in the number of HNWI population, according to the report.

In 2009, the number of HNWIs grew in Saudi Arabia and Bahrain but declined in the UAE. Saudi Arabia had 104,700 HNWIs at the end of 2009, an increase of 14.3 per cent from the previous year. The number of HNWIs in Bahrain stood at 5,400, up 7.2 per cent from 2008. In contrast, the HNWI population in the UAE declined by 18.8 per cent to 54,500 due to unprecedented market conditions. "The rebound has been, and will continue to be, driven by emerging markets – especially India and China, as well as Brazil," said Yasar Yilmaz, Regional Head of Sales, Middle East, Global Financial Services, Capgemini. "In fact, Asia-Pacific was the only region in which both macroeconomic and market drivers of wealth expanded significantly in 2009," he added.

"Global growth, market capitalisation and performance of commodity prices will be the key drivers to performance in case of the UAE," said Sadr.

10 million millionaires

The world's population of HNWIs increased to 10 million in 2009 from 8.6 million in 2008 and HNWI financial wealth increased to $39trn, according to the World Wealth Report. The number of UNHWI was 93,100 worldwide, including 36,600 in North America. UHNWIs increased their wealth by 21.5 per cent in 2009, and were 0.9 per cent of the total HNWI population although they accounted for 35.5 per cent of the global rich's wealth. At the end of 2008, UHNWIs accounted for 34.7 per cent of global HNWI wealth, but only 0.9 per cent of the total HNWI population, according to the previous year's report.

At the end of 2008, the world's population of HNWIs was down 14.9 per cent from the year before to 8.6m, and their wealth had dropped 19.5 per cent to $32.8trn.

The unprecedented declines had wiped out two robust years of growth in 2006 and 2007, taking both the HNWI population and its wealth below levels seen at the close of 2005. The United States, Japan and Germany together accounted for 54 per cent of the world's HNWI population in 2008, up marginally from 53.3 per cent in 2007. In the Middle East, the super-rich formed 0.9 per cent of the HNWI population.

Geographically, 0.9 per cent of HNWIs were UHNWIs in the case of the Middle East. Wealth of HNWIs in the Middle East was $1.4trn in 2008, down from $1.7trn 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 Sadr.

Asia Pacific caught up with Europe in terms of HNWI population, while it surpassed Europe in HNWI wealth. After falling 14.2 per cent in 2008 to 2.4 million, Asia-Pacific's HNWI population rebounded in 2009 to reach three million, matching that of Europe's HNWI population for the first time.

Asia-Pacific wealth also surged 30.9 per cent to $9.7trn, more than erasing 2008 losses and surpassing the $9.5trn in wealth held by Europe's HNWIs. This shift in rankings 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 the growth in Asia-Pacific, after experiencing massive declines in their HNWI bases and wealth in 2008.

Of the 10 million HNWIs in 2009, North America had 3.1 million individuals in this category, while Asia-Pacific and Europe had three million individuals each.

Asia-Pacific saw a 25.8 per cent growth in terms of number of HNWIs.

By region, North America held $10.7trn of the total $39trn of HNWI wealth, whereas Asia-Pacific, with a 30.9 per cent growth over 2008, held $9.7trn.

The global high net worth individual population remained highly concentrated and US, Japan and Germany accounted for 53.5 per cent of this, the report said. Going forward, Asia-Pacific and Bric nations (Brazil, Russia, India and China) are the likely future powerhouses of HNWI growth, the report said. 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.

Market capitalisation

Global market capitalisation rose almost 47 per cent and touched $47.9trn. The global markets lost the last five years growth in 2008 but they rebounded in 2009 across all regions and recovered nearly three years of growth, the report said.

"The spillovers from the global financial crisis negatively affected GDP growth in 2009 and governments stepped up efforts to stimulate economic recovery and boost the financial system. Key drivers of wealth such as market capitalisation, commodities, hedge funds, had a year of strong gains," it noted.

World GDP growth, it said, is forecast to be positive in 2010 and 2011 with Asia Pacific, excluding Japan, expected to show the highest growth across all regions.

While world GDP growth is estimated at three per cent in 2010, for Asia Pacific, this growth is estimated at seven per cent.

The Middle East and North Africa is set to grow at 4.5 per cent and shows a sustained growth in 2011.

Cautious approach

In terms of allocations, the HNWI investors favoured predictable returns and cash flow, as evidenced by the rise in allocations to fixed-income instruments, to 31 per cent from 29 per cent.

Equity holdings also rose, from 25 to 29 per cent, 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 per cent of their aggregate portfolios in either cash/deposits or fixed income, despite surging equity prices. Investments in residential real estate regained some of its appeal in 2009 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 per cent from 45 per cent as prices recovered across much of the globe.

Commercial real estate holdings, however, dipped slightly to 27 per cent from 28 per cent as the sector experienced falling rental incomes, weak demand and increased supply. The geographic distribution of HNWI assets also shifted in 2009 as HNWIs generally sought higher returns and greater geographic diversification in their portfolios.

Overall, HNWIs in all regions except Latin America increased the relative share of holdings in markets outside their home regions in 2009. This could be reflected by an increase in HNWI allocations to emerging markets as investments flowed to regions and markets expected to have the most growth in the coming years. This shift countered a widespread trend toward asset repatriation to home regions during the crisis.

"The crisis hit investors at every level of wealth and impacted them on a personal and emotional level," said Sadr.

"Many lost incomes, saw their retirement savings shrink or tried to open new businesses or take out loans but were unable to find cash," he said. By 2011, HNWIs are expected to further 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," said Sadr.

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

In spite of stock market rebounds and emerging signs of recovery in various economic indicators, wealthy investors have not rushed to chase performance or seize risky market opportunities. High net worth individuals have remained cautious and point to effective risk management (90 per cent), transparency and simplicity (93 per cent), and specialised advice (93 per cent) from firms and advisors as top priorities in the current environment, according to the report.

They are especially keen as they work more actively with their advisors to properly understand the nature and potential performance of specific investments, manage their downside risk, and receive advice that is aligned with realistic and appropriate goal-setting, based on their actual risk profile.

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