Emerging markets witness largest wealth creation in 2007

Emerging markets have witnessed the largest rise in wealth of high net worth individuals (HNWIs) in 2007, thanks to sustained levels of economic growth, a Merrill Lynch report has found.

The largest regional growth of the HNWI population occurred in the Middle East, Eastern Europe and Latin America, with increases of 15.6 per cent, 14.3 per cent, and 12.2 per cent, respectively, the bank said.

The Middle East's growth was driven by sharp increases in oil prices, highlighted by the 57.2 per cent gain on crude oil futures. It was also the region with the most exposure to commercial real estate, with 33 per cent of HNWI real estate investments allocated to this asset.

Meanwhile, India led the world in HNWI population growth at 22.7 per cent, boosted by market capitalisation growth of 118 per cent and real gross domestic product (GDP) growth of 7.9 per cent. Although India's real GDP growth decelerated from 9.4 per cent in 2006, current levels are considered more stable and sustainable. The Annual World Wealth report also said China experienced the second largest expansion of their HNWI population, advancing 20.3 percent – an increase fuelled by market capitalisation growth of 291 per cent and real GDP growth of 11.4 per cent.

Amir Sadr, Head of the Middle East Wealth Management business at Merrill Lynch, said: "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 the Middle East, India, China and Brazil.

"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 unique needs of these target growth markets," he added.

Merrill Lynch estimates there are 10.1 million HNWIs globally – an increase of six per cent over 2006 and that HNWI financial wealth grew 9.4 per cent over the year to $40.7 trillion (Dh149trn). This figure is expected to hit $59.1trn by 2012, growing at an annual rate of 7.7 per cent.

The total number of ultra-HNWIs in 2007 was 103,320, an 8.8 per cent increase over 2006. HNWIs are classed as having investable assets of $1 million or more, while ultra-HNWIs have more than $30m to invest. The report covers 71 countries, accounting for 98 per cent of global gross national income and 99 per cent of world stock market capitalisation.

The combined wealth of HNWIs in the UAE currently stands at $91 billion, according to a report.

Driven by strong economic growth in recent years, the number of such individuals in the UAE jumped to 79,000 up from 68,000 in 2006, said Merrill Lynch's World Wealth report.

In Saudi Arabia the number of HNWIs now stands at 101,000, up from 90,000 in 2006, with a combined total wealth of $182bn.

EMERGING MARKETS

Emerging markets made significant contributions to record-level worldwide IPO activity in 2007. More than 1,300 IPOs raised $300bn during the year, and emerging markets captured seven of the top 10 issues.

Brazil, Russia, India and China (BRIC) showed particular strength in the area, accounting for 39 per cent of global IPO volume in 2007, up from 32 per cent 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 $55bn. Emerging Europe was the most popular regional destination, attracting $276bn.

Meanwhile, emerging Asia experienced a 20 per cent drop in private capital flows.

Merrill Lynch said that fuelled 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 $6.5bn IPO of a Spanish utilities group and the $1.2bn IPO of a Brazilian sugar and ethanol producer," the wealth report said. Total investment in clean technology increased 35 per cent, boosted by numerous clean technology benchmark indexes gaining more than 50 per cent for the year.

The report found due to overall heightened interest in the environment, 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. The total investment in clean technology increased to $117bn in 2007, up 41 per cent from 2005. The Middle East and Europe were the most environmentally attuned HNWI and ultra-HNWI populations, with participation ranging from around 17 per cent to 21 per cent in 2007.

In comparison, only 5 per cent of HNWIs and 7 per cent 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.

With a significant portion of HNWI wealth invested in stock markets, market capitalisation performance is an important determinant of HNWI wealth generation, said Sadr.

"While traditional United States, European, and Asian stock market indexes experienced moderate growth, many emerging markets extended winning streaks of robust gains," he added.

Dow Jones Market Indexes had moderate returns in 2007, averaging 6.8 per cent, far below the 17.3 per cent 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. "The divide between market capitalisation growth in mature and emerging economies was significantly more pronounced in 2007 than in previous years," said Sadr.

"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."

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, they began to retrench, shifting their investments to safer, less volatile asset classes, according to the report.

It found that cash/deposits and fixed income securities accounted for 44 per cent of HNWI financial assets, up nine percentage points from 2006. Fixed income securities saw a six percentage point increase in asset allocation, accounting for 27 per cent of holdings, up from 21 per cent in 2006.

GLOBAL SCENARIO

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.

Sadr said the report's results had implications for the approach taken to handle HNWIs by the wealth management industry.

"Some wealth management firms are already successfully growing and transitioning into new markets, but for many others, the transition is far from easy or viable given existing service models and infrastructures.

"To accommodate the needs of diverse clients and advisors in both established and new market segments, firms must design flexible service models.

"Service models that align IT and growth strategies will enable wealth managers to leverage their current business platforms and enhance their operational capabilities, which substantially reduces the risks of entering a new market."

He added: "Those firms that best understand their clients will be most effective at capitalising on existing strengths to transform and adapt their service delivery to meet the needs of clients in a target growth market."

UAE MILLIONAIRES AT 79,000

The UAE's population of investors with more than $1 million (Dh3.67m) in assets has grown to 79,000, up from 68,000 in 2006, driven largely by inflationary pressures and a cap on annual rent increases, Merrill Lynch said.

The combined wealth of the high net worth individuals now stands at $91 billion, according to the Annual World Wealth Report.

The bank said 7.5 per cent real GDP growth, the cap of five per cent on annual rent rises and strong inflationary pressures had fuelled the 15.3 per cent rise of the super-rich.

More competitive non-oil exports and strong domestic and foreign investment in new projects also played a role.

The wealth report said recent interest rate cuts and leaping inflation rates had inhibited the growth of HNWIs in the UAE.

Globally, there were 10.1 million HNWIs last year, an increase of six per cent over 2006.

"The worldwide pool of HNWIs is shifting as global economic and demographic trends bring entirely new investors into the bracket, creating strong growth potential for wealth management firms, that can best adapt existing market strategies to meet the unique needs of new markets," said Amir Sadr, Head of the Middle East Wealth Management business at Merrill Lynch.

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