ME and North Africa suffers one of the biggest falls in wealth

The Middle East and Africa saw one of the highest drops in wealth last year at about 6.2 per cent or $200 billion (Dh734bn) to $3 trillion against $3.2trn in the previous year, said a report.

The biggest wealth decline was in North America, where assets under management (AuM) fell by 21.8 per cent.

Japan recorded a decline of 7.8 per cent. Asia-Pacific saw a fall of 6.2 per cent and Europe witnessed a decline of 5.8 per cent, Boston Consulting Group, a global management-consulting firm, said in its Global Wealth Report 2009.

These changes were measured in local currencies to exclude the impact of fluctuating exchange rates.

The US remained by far the wealthiest country, with $27.1trn in AuM.

Japan had the second-highest AuM at $13.5trn. Wealth in the remainder of the Asia Pacific region totalled $11.5trn.

The smallest regional markets were the Middle East and Africa, at $3trn, and Latin America at $2.5trn.

The global financial crisis had a moderate impact on the Middle Eastern economies compared to other regions in the world.

Real estate markets dropped by 30 to 40 per cent in 2008 before showing a slight recovery in the second-quarter of 2009.

The regional economies are not expected to contract, but they did witness a significant slowdown in GDP growth.

Many wealthy families have been affected by the turmoil in Western markets.

The number of millionaire households fell from 11 million to about nine million last year.

Europe and North America saw the biggest decline.

In both regions, the number of millionaire households fell by 22 per cent.

Among the 62 markets in the study, the United Kingdom had the steepest decline in millionaire households at 47 per cent.

The BCG report said some small countries continued to have the highest concentrations of millionaire households.

In Singapore, 8.5 per cent of all households had at least $1m in AuM.

Switzerland had the highest concentration of millionaire households in Europe and the second-highest overall at 6.6 per cent.

Three of the six densest millionaire populations were in the Middle East – in Kuwait, the UAE and Qatar.

Despite large population and direct exposure to the crisis, the United States nonetheless had the fifth-highest density of millionaire households at 3.5 per cent.

The report said the global revenue pool for wealth managers declined by two per cent to about $1.2trn as good performance in the first half of the year helped offset much weaker performance in the second half.

The smallest revenue pools were in Latin America, at about $38bn, and the Middle East and Africa at about $35bn.

Europe had the largest revenue pool at about $418bn, followed by North Africa at about $339bn.

Both Japan and the rest of Asia-Pacific had revenue pools of around $190bn.

Most of the revenues were derived from clients with less than $1m in AuM.

They accounted for $939bn of the total revenue pool. Millionaire clients, by comparison, accounted for $271bn in revenues.

The report said the share of the global wealth invested in equities decreased 39 per cent to 28 per cent last year, representing an absolute decline of $16.6trn.

This was driven mainly by by stock market losses, but client behaviour also played a role as investors gravitated towards more conservative investments, such as bonds or cash.

Conservative investments were also affected by the crisis. Even though the share of wealth invested in conservative assets, such as bonds and cash, grew in all regions, in some regions the amount of AuM held in these assets decline in absolute terms.

In North America, wealth invested in bonds and cash fell by 6.4 per cent and 4.9 per cent respectively.

In Latin America, investments in bonds and cash were down by 7.5 per cent and 4.8 per cent respectively. In Europe, cash investments fell by 3.5 per cent.

In the Middle East and Africa, they were down by nearly 2.8 per cent.

The BCG analysts said wealth managers will be dealing with the repercussions of shattered trust and compromised relationships for some time to come. In the Middle East, where clients have traditionally had deep and lasting relationships with their wealth managers, major brands have suffered considerably.

Investors may be more willing to start a new relationship in order to diversify their holdings.

Some may even consider replacing their primary wealth manager.

Those who have lost a large share of their wealth are likely to resent high fees for mediocre service and lackluster performance.

Some clients are even seeking compensation for losses incurred as a result of the crisis.

The effects of strained relationships vary.

In some markets, clients are diversifying their relationships to avoid becoming dependent on one advisor or institutions.

In other markets, clients are shedding banks in order to concentrate on the one organisation they trust the most. In both cases, clients are locking on to trusted brands – although in the wake of the crisis, even the most venerable names have been tarnished.

Institutions that have a history of providing advice that is conservative – even sober – stand to strengthen their existing relationships and make significant inroads into new markets.

The BCG report said the amount of offshore wealth fell to $6.7trn in 2008, down from $7.3trn in the previous year. the decline was relatively modest considering the pressures facing offshore banks. About half of the offshore wealth was held in Switzerland and the centres of the United Kingdom.

It said that a considerable threat to offshore banking stems from a less conspicuous but more fundamental change. In places such as Brazil, India, and China, investors continued to gain confidence in local banking systems and are becoming more receptive to onshore investments.

In other markets, demand is shifting away from offshore investments for different reasons. In the Middle East, for example, a younger generation has assumed control of a larger proportion of the wealth.

They find regional investments an interesting and attractive alternative to offshore banking.

The BCG analysts believe that the share of assets held offshore to decrease in Asia Pacific (excluding Japan), Central and Eastern Europe, Latin America and the Middle East and Africa, while remaining stable in the large industrialised countries.

The report said global wealth grew at an estimated annual rate of nine per cent from 2001 to 2007.

Wealth management was an everlasting success story – or so it seemed.

Wealth managers had limitless options to expand in regions such as Asia and the Middle East and clients were relatively easy to satisfy.

Absolute performance was mostly good, and the industry continued to produce a steady stream of increasingly sophisticated products.

The report claimed that banks in the Middle East have avoided the worst effects of the crisis and are not pursuing major changes to their business models.

Still, many reacted promptly to the crisis by laying off underperforming employees, especially in the front office.

In Asia, most emerging economies are still growing, albeit at a slower pace and markets bounced back during the first half of 2009.

Institutions have also been able to reduce or outsource auxiliary positions without affecting the core business.

The report said that wealth managers in Asia and Middle East have reduced salaries by 10 per cent or more. Institutions in Europe and North America are cutting variable bonuses, owing in no small measure to public pressure.

Wealth will begin a slow recovery in 2010 but may not reach its precrisis level until 2013. From year-end 2008 through 2013, the BCG expects AuM to grow at a compound annual growth rate (CAGR) of 3.8 per cent and to reach $111.5trn.

Several factors will impede a fast turnaround.

Although many stock markets have shown signs of a recovery, broader economic indicators suggest that a downward correction of major stock markets is still possible.

In addition, wealth has been flowing out of bankable assets into tangible investments, such as real estate or gold, which are not included in Boston's definition of AuM. Additionally, entrepreneurs in many markets have been forced to underwrite their ventures using their own wealth.

And with unemployment rising in many markets, a growing number of households – particularly in the lower wealth bands – will be forced to tap into their savings. Finally, the uncertain outlook for many economies is deterring new investments, thereby limiting the creation of wealth.

Asia-pacific – excluding Japan – is expected to be the fastest-growing wealth market. From year-end 2008 through 2013, the BCG analysts expect AuM in the region to grow at an average annual rate of 9.5 per cent, boosting its share of global wealth from 12 per cent to 16 per cent over the same period last year.

Some countries in the region, such as China and India, have not been affected by the banking crisis.

Their economies continue to grow, fuelled by domestic demand and, in some cases, government intervention.

China has launched a fiscal stimulus programme and eased monetary policy to strengthen its economy and boost consumption.

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