High net worth individuals (HNWIs) in the Middle East keep getting richer, but not as fast as their wealthy peers elsewhere in the world, with economic recoveries in Brazil, Russia and Canada prompting the largest rises in wealth, according to a new report from Cap Gemini.
The number of Middle Eastern HNWIs - defined as persons with wealth equal to or exceeding - $1 million - rose 4.8 per cent to 600,000 in 2016, with their combined wealth rising 5 per cent to US$2.42 trillion, according to the consultancy's World Wealth Report for 2017. The growth figures for the region are slower than for any of the five other regions tracked.
Globally, the number of HNWIs rose 7.5 per cent to 16.5 million and their wealth expanded by 8.2 per cent to $63.5tn.
The world’s richest are on track to expand their wealth by 5.9 per cent annually to reach $106tn by 2025, Cap Gemini forecast.
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While the report didn’t give a reason for the Middle East’s comparatively sluggish performance, the region has suffered from an oil-price slump that started in mid-2014 and has led to economic slowdown in the energy-rich Arabian Gulf region, which sits on the world’s biggest oil and gas reserves.
The biggest gainers in wealth last year were concentrated in Brazil, Russia and Canada, as an economic resurgence in each country helped reverse a downward trend in wealth accumulation.
The number of Russia's richest expanded at the fastest global pace of 19.7 per cent in 2016, following a 1.8 per cent drop in 2015, thanks to a recovery in the country's equity markets. It was a similar case in Brazil, where rebounding equity and real estate markets pushed the number of HNWIs to grow 10.7 per cent, reversing a 7.8 per cent plunge in 2015.
Although the Asia-Pacific region retained its position as the region with the largest HNWI population, it suffered from a modest slowdown in growth in its number of rich individuals, which grew by 7.4 per cent for the year, while their wealth increased 8.2 per cent. Lower stock market valuations in China contributed to the slower pace of growth.
Despite this downtrend, Asia-Pacific is forecast to continue to dominate the HNWIs space in the coming eight years, followed closely by growth in North America, which will expand but at a slower pace than those achieved in 2005 through 2016.
The world's top four wealth markets - the US, Japan, Germany and China - are losing their edge in terms of numbers of newly minted HNWIs.
Only 59 per cent of new HNWIs emerged from the top four markets last year, compared with 81 per cent in 2015.
Ultra-HNWIs, with wealth equal to or exceeding $30m, grew in number thanks to growth of the richest population in Latin America, which has the highest concentration of ultra-HNWIs than any other region.
The global population of ultra-HNWIs expanded 8.3 per cent, nearly double the rate of 4.2 per cent recorded in 2015.
In terms of asset classes, equities were the biggest contributor to wealth formation worldwide.
Equities investments grew 6.3 per cent, representing one third of all HNWIs assets, a five-year high.
HNWIs are favouring equities investments and cash and equivalents over alternative investments which dropped 6 percentage points to 9.7 per cent of allocations, the lowest of all asset classes.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
