Asia-Pacific has topped Europe for the first time in the size of its rich population, driving global wealth levels back beyond the pre-crisis days of 2007, finds the World Wealth Report 2011.

The region recorded a 9.7% year-on-year increase in high-net-worth individuals (over $1 million in investible assets) to 3.3 million in 2010, compared with 6.3% growth to 3.1 million in Europe. North America expanded 8.6% to 3.4 million.

Overall there are 10.9 million HNWIs globally, a mean increase of 8.3%, whose financial wealth swelled about 10% last year to $42.7 trillion – above the 2007 high of $40.7 trillion.

The global break-down of HNWI assets is: $11.6 trillion for North America (up 9.1%); $10.8 trillion for Asia-Pacific (12.1%); $10.2 trillion for Europe (7.2%); $7.3 trillion for Latin America (9.2%); and $1.7 trillion for the Middle East (12.5%).

Growth in the number of HNWIs and their wealth was understandably slower than in 2009 – when it expanded 17.1% and 18.9%, respectively – on account of last year’s rapid rebound from 2008 losses.

Tellingly, HNWI wealth in Asia-Pacific has risen 14.1% since the end of 2007, erasing all crisis-related losses in the interim. America and Europe have still yet to fully recoup their losses.

It is also noticeable that Asia-Pacific continues to contribute the greatest year-on-year additions to global HNWI ranks: Hong Kong (up 33.3%), Vietnam (33.1%), Sri Lanka (27.1%), Indonesia (23.8%), Singapore (21.3%) and India (20.8%).

While these populations remain relatively small, India entered the top 12 for the first time with 153,000, while Spain dropped from 12th to 14th. Australia jumped a notch to 9th with 193,000, overtaking Italy.

The global population of ultra-HNWIs (over $30 million), meanwhile, grew 10.2% to 103,000, while their wealth increased 11.5%. They now account for 36.1% of global HNWI wealth.

Market drivers
Global equity market capitalisation surged 18% in 2010 (after a 49% rise in 2009) to $54.9 trillion – still well below the 2007 high of $61.5 trillion. Of this, the Americas comprise 40%, compared with 32% for Asia-Pacific and 28% for Europe, Middle East and Africa.

The world’s wealthy were eager to recoup crisis-related losses and capitalise on the run-up in stock prices last year which were underpinned by government stimulus measures, notably in the US.

The wealthy ended 2010 with 33% of their assets in equities, from 29% a year earlier. Allocations to cash/deposits dropped to 14%, from 17%, and the share in fixed income dipped to 29%, from 31%.

The report’s authors forecast that the equity share of overall HNWI holdings will rise five percentage points to 38% by end-2012, while allocation to fixed-income investments will hold steady at 29% and the share held in cash/deposits is tipped to drop three points to 11%.

Regional distribution
Overall, 39% of global HNWI assets were held in North American investments, from 38%, while 21% was in European assets, from 23%. The proportions held in Asia-Pacific (22%), Latin America (13%) and the Middle East (3%) remained the same year-on-year. “However, that apparent stability belies some important intra-year shifts,” states the report.

Investors poured a record $80 billion into emerging-market equity funds and $34 billion into EM bond funds in the first 11 months of last year, according to estimates from data provider EPFR.

But by the year’s end many had opted to lock in gains (MSCI Emerging Market Index up 104% since 2008). Plus, opportunities started to improve in other markets, specifically US equities after the Federal Reserve initiated monetary easing in September.

Once the US government unveiled new fiscal stimulus in December, in just three weeks investors reallocated $22 billion into US stock funds, estimates EPFR.

North American HNWIs, meanwhile, held the highest percentage of their assets (76%) in home-region investments, although that’s expected to drop to 68% by end-2012 as they re-distribute to emerging markets for higher returns and to alternative developed markets to diversify risk.

This trend was evident among European HNWIs, too. Their home-region allocations dropped to 56%, from 59%, while their holdings in North America and emerging markets edged up. By 2012, their home-region allocation is expected to slide a further seven percentage points.

In Asia-Pacific, home-region allocations among HNWIs also fell, to 57%, from 64%, with a rise in North American investments to near pre-crisis levels of 25%, from 19%. These are tipped to remain the same next year, although Asia’s wealthy are also expected to tap opportunities in other emerging markets.

Alternative investments
Global HNWI allocation to real estate stood at 19% by the end of 2010, from 18% a year earlier. Residential real estate remains the largest sub-segment, but exposure dipped slightly to 46% of all property holdings amid declining prices and uncertain economic and housing outlooks. HNWI exposure to commercial real estate was little changed at 26%.

Holdings of residential real estate were highest among Asia-Pacific ex-Japan HNWIs at 51%, although this declined from 60%. The share of commercial real estate holdings among Asia-Pacific ex-Japan HNWIs rose to 37%, from 24%, and in the Middle East to 34%, from 29%.

Real estate investment trust (Reit) holdings increased to 15% of all property investments in 2010, from 12%. Reit allocations were proportionally higher in North America and Japan (24% and 23%, respectively), largely as Reit vehicles are more available and accepted in those markets.

But real estate holdings overall are expected to decline to 15% of all assets among HNWIs, from 19%, given apprehension about the sector’s generally slow recovery from crisis-related losses.

In the alternatives universe, HNWIs favoured exposure to foreign currency and commodities. Demand for agricultural products and metals, especially from fast-developing nations such as China and India, pushed prices of many commodities to new highs, with further increases forecast this year.

Commodity investments accounted for 22% of all alternative investments in 2010, from 16%. Foreign currency holdings increased to 15% of all alternative investments, from 13%, as investors bought into currencies where interest rates were higher than in the US and Europe.

Meanwhile, hedge fund holdings declined proportionally to 24%, from 27%. While the Dow Jones Credit Suisse Hedge Fund Index rose 11% in 2010, most of the gains were posted at the end of the year – pushing total industry assets to $1.9 trillion, near the historic peak of 2008.

Alternative investment preferences varied by region. HNWIs from North America and Latin America held more commodities than average (30% and 26%, respectively). HNWIs in Japan allocated 34% to foreign currency, versus the 13% global average, and 26% to structured products which was more than HNWIs in any other region.

HNWIs in Asia-Pacific ex-Japan allocated 22% of alternative investments to structured products, against a global average of 17%. And hedge funds were still a key vehicle for HNWIs in Latin America, where they accounted for 35% of all alternative investments (from 49%).

There was also an increase in demand for investments of passion including diamonds, fine and rare watches, wine and high-end artifacts. Buyer participation from Asian countries saw exponential growth, led by mainland China, India, Singapore and Hong Kong.

On the global economy, the report notes that the macroeconomic imbalances between mature and developing economies have increased since the financial crisis.

Looking ahead, it points out that governments need to manage country-specific effects of these imbalances on economic growth, while weaning their economies from crisis-related stimulus to reduce gaping fiscal and current account deficits, as well as managing inflation pressures.

“The resultant government actions will affect the pace of global recovery and determine the extent to which Asia-Pacific and other emerging economies remain a target for global investors seeking high-growth returns,” it concludes.

The 15th annual World Wealth Report was compiled by Merrill Lynch Global Wealth Management and consultancy Capgemini.