Everyone knows 2008 was an extremely tough year, with the global financial crisis shaving off hundreds of billions of dollars in global wealth. The latest World Wealth Report attempts to measure those losses, at least for the world's richer population which bore the brunt of the impact of the crisis.
The wealth of the world's high-net-worth individuals (HNWIs) fell by 19.5% to $32.8 trillion in 2008 from $40.7 trillion in 2007. That's an unprecedented decline in HNWI assets in the 13 years that Merrill Lynch and consulting firm Capgemini have collaborated on this report. All regions suffered losses in HNWI assets, with North America (down 22.8%), Asia Pacific (down 22.3%), and Europe (down 21.9%) leading the decline. The US remains the single largest home to HNWIs, with a population of 2.46 million in 2008 (down from 3.019 million in 2007).
Also a record is the 14.2% drop in the population of HNWIs worldwide to 8.6 million in 2008 from 10.1 million in 2007. North America also suffered the most in terms of the number of people that fell off the rich list (down 19%), followed by Europe (down 14.4%) and Acsia (down 14.2%). The fate of the ultra-rich was much worse, with their population down by 24.6%.
Stock market losses were largely responsible for the loss of wealth. Although HNWIs have a diversified portfolio that includes financial assets from property to art, the bulk of their wealth has been diverted to equities over the past years. Global stock market capitalisation plunged 49% to $32.6 trillion in 2008 from a historic high of $63.4 trillion, which is a flashback to levels last reached in 2003.
Valuations of equities "turned from challenging to extremely distressing" in 2008 and how share prices perform from here on will have a major effect on wealth trends because the relationship between HNWIs and stock markets is "very correlated", says Francis Liu, market managing director for Greater China at Merrill Lynch Global Wealth Management.
This latest report brings the HNWI asset and population levels back to their end-2005 levels, virtually wiping out any collective gains made in 2006 and 2007 when stock markets worldwide were mostly in a state of delirium over their extended rallies. Merrill Lynch defines HNWIs as those with net assets of at least $1 million (excluding primary residences and consumables) and ultra HNWIs as those with net assets of at least $30 million.
There are two things to note with this report.
First, despite expectations of continued volatility in stock markets worldwide -- which is clearly the main source of wealth of the people that fall within this elite bracket -- and despite the fact that no one has a crystal ball that can predict exactly how the global economy will recover from the crisis, Merrill Lynch and Capgemini are confident that HNWI assets will grow by 48% to $48.5 trillion by 2013, which translates to a projected annual growth rate of 8.1%.
Second, there is the question of how accurate the findings are to begin with. They are, after all, based mainly on best estimates using publicly available data. The methodology starts with a macro look at the total wealth of a country before making assumptions on a micro level. So while the figures presented in the World Wealth Report reflect an earnest attempt to show a picture of the assets and population of the world's HNWIs, they could very well be an under-representation of what's actually out there. The report notes, for example, that China had 364,000 HNWIs in 2008 (down from 413,000 in 2007). Does that reinstate the belief that only a minority of China's more than one billion population hold the key to the nation's wealth; or is it an inability to capture the value of the wealth that's out there?
Liu points to previous growth figures to back-up the 2013 forecast. He notes that HNWI assets grew by around 8% to 9% from 2002 to 2007 even with the financial problems during that time. Clearly optimistic about the future, he expects the five-year period from 2008 to even things out.
North America (mainly the US) and Asia-Pacific (mainly China) are expected to lead the growth in HNWI assets and population over the next five years, backed by expectations of higher US consumer spending and an increased autonomy of the consumer-led mainland economy. Asia-Pacific is expected to overtake North America in terms of HNWI assets by 2013, thanks in large part to China's relatively robust growth.
With regard to the quality of the data, Liu concedes that the HNWI asset and population figures used in the World Wealth report are likely "conservative" and "understated", but when used consistently over the past 13 years, still paint a pretty good picture in terms of growth trends.
Wealth trends in Asia
Looking specifically at Asia, the region's HNWI assets fell 22.3% to $8.3 trillion in 2008 from $10.7 trillion in 2007. Its HNWI population fell 14.2% to 2.4 million from 2.8 million.
Still highly dependent on exports, Asia was also severely affected by the crisis as global demand for products dried up, particularly towards the end of 2008.
In terms of the stock market, those with the largest gains in the region in 2007 led the losses in 2008. China's market capitalisation was down 60% in 2008 after a surge of 291% in 2007, while India's was down 64% in 2008 after jumping 118% in 2007.
Merrill Lynch and Capgemini declined to reveal the complete details relevant to Asia, opting to reveal the full report on the region's wealthy individuals separately in October.
However, snippets of information reveal that China -- with its 364,000 in HNWIs -- has overtaken the United Kingdom as the fourth highest ranking market worldwide in terms of HNWI population. This marks another step up for China, which overtook France in the rankings in 2007. Japan, with a HNWI population of 1.366 million, is still firmly second to the US.
Hong Kong and India suffered the most in terms of the number of people who can no longer call themselves US dollar millionaires. The HNWI population fell by a whopping 61.3% in Hong Kong to 37,000 in 2008 from 96,000 in 2007, and by 31.6% in India to 84,000 in 2008 from 123,000 in 2007.
Hong Kong's poor showing in this year's report can be explained by the 50% fall in stock market capitalisation and the 12.6% average decline in property prices in 2008. Add to that the fact that the majority of Hong Kong's HNWIs just barely made it to the list to begin with, as many of them fell in the $1 million to $5 million range. Being borderline HNWIs meant that last year's stock market losses were enough to change their overall fortunes.
Like Liu, Stephen Corry, Asia-Pacific investment strategist at Merrill Lynch Global management, also prefers to look at the bright side. He notes that investor sentiment has already improved, with the Hang Seng Index up 27% so far this year and property prices recovering somewhat thanks to low interest rates and higher liquidity. Another thing in Hong Kong's favour is its role as a conduit for investors interested in gaining exposure to the China market.
India also suffered from a hefty drop in stock market capitalisation (it was down 64.1% in 2008) and a steep decline in demand for its goods and services.
Japan, which accounts for more than 50% of the HNWI population in Asia-Pacific, suffered a relatively mild 9.9% decline in HNWI population. Japan's relative resilience has to do with the fact that the rich list has grown that much over the past two years and the individual asset levels are higher compared with other markets, allowing the Japanese to survive stock market losses better than most in the region.
In terms of asset allocation in Asia and worldwide, wealthy individuals took cover in fixed-income and cash-based investments, making up 50% of overall portfolios of HNWIs in 2008. HNWIs also retreated to home markets, going back to investments they were familiar with and had more confidence in. They also returned to real estate, with this asset class making up 18% of overall portfolios of HNWIs in 2008.
Impact on wealth management industry
The global financial crisis has most certainly taken its toll on the wealth management industry. It has shaken the trust and confidence that HNWIs previously placed on markets, regulators, financial institutions and even the principle of portfolio management, according to Capgemini.
"Mainly due to the loss of trust and confidence, more than 25% of HNW clients surveyed withdrew their assets from a wealth management firm or completely switched over to another firm in 2008," says Arvind Sundaresan, head of sales for Asia-Pacific at Capgemini Hong Kong.
Sundaresan says the switching trend was more prevalent among individuals below the age of 45 as well as those who earned their wealth rather than inherited it.
To prevent client attrition and strengthen retention, Capgemini says financial advisors and wealth management firms must pursue more open and transparent client communications, provide more risk-related information, and improve client services.