Asia Pacific leads world in creating wealth
The Asia Pacific region houses a higher proportion of High Net Worth Individuals (HNWIs) than any other region on earth.
The claim is part of the World Wealth Report prepared by Merrill Lynch which studied wealth effects in seventy one countries, which account for 98% of global gross income and 99% of world stock market capitalization.
The asset wealth calculations in the report are derived from private equity holdings (at book-value), publicly listed equities, bonds, funds, and cash deposits. They do not take account of consumables, consumer durables, privates homes used as principal residences or collectibles.
The 2009 World Wealth Report estimates that in 2008 the number of HNWIs reduced by nearly 15%. The wealth of the remainder declined by nearly 20%. While the Asia Pacific leaped ahead it also hosted the state with the bigger loss of HNWIs, Hong Kong, which shed around 60%.
China was the winner big with wealthy individuals mushrooming to the point where the country has become the fourth largest population of HNWIs, in front of Great Britain.
In terms of figures, the population of High Net Worth Individuals has now been slimmed to 8.6 million, and their wealth had reduced down to $32.8 trillion.
An interesting note is that Japan accounts for 50% of the high net worth individuals in the Asia Pacific region, and they in 2008 lost only 11% of their worth.
Perhaps Asia Pacific News.Net should point out High Net Worth Individuals (HNWIs) are counted as such if they have at least $1 million (US dollars) in investment assets, excluding their residence, collectibles, consumables, and consumer durables.
Ultra-High Net Worth Individuals (Ultra-HNWIs) hold at least US$30 million in investment assets, excluding their primary residence, collectibles, consumables, and consumer durables.
By the start of 2009, Ultra-HNWIs comprised 34.7% of global HNWI wealth, but only 0.9% of the total HNWI population.
Three countries account for more than half (54%) of the world’s wealth, and two of those may come as a surprise. The three are the United States, Germany and Japan.
China, as we said earlier, is growing its wealth population fast. It surpassed France in 2007, and entered 2009 ahead of Britain with 364,000 HNWIs. China’s sound and fast-growing economy continues to create wealth at an abounding pace for Chinese investors.
Hong Kong, as we said, bore the brunt of the downturn reducing its high net worth population by 61.30% to 37,000.
This probably reflects the massive fall (49.90%) in the Hong Kong Hang Seng.
Indian stock markets also took a bath in 2008 and stripped a high number of its wealthiest citizens of their wealth. This was a surprise as India entered 2008 with the highest growth in 2007 of any country (22.70%). In 2008 India shed 31.6% of its wealthiest population to 84,000.
Notwithstanding the disappointments of India and Hong Kong, the Asia Pacific region is a stand-out performer in creating wealth, and according to Merrill Lynch will outpace North America by 2013.
National savings fell globally in 2008, sharply reducing wealth, and the collapse of funds reduced the number of avenues for investment. The ratio of combined national savings to GDP fell to 22.6% globally, from 23.1% in 2007, and to 16.4% in G7 countries, down from 17.2%, according to The Wealth Report.
It is customary for a decreased level of national savings to coincide with an increase in total consumption (private and public spending). Global government consumption did increase in 2008—by $0.3 trillion worldwide, partly driven
by widespread government outlays on financial bailouts and economic stimulus packages.
However, 2008 saw a global slowdown in consumer spending, as eroded consumer confidence and scarce credit prompted widespread thrift. The most salient example of this trend was in the U.S., where consumer spending grew just 0.2% in
2008, after a gain of 2.8% in 2007—while the fourth-quarter personal savings rate jumped to the highest rate since the third quarter of 2001 (3.2% of disposable income). In Europe, personal spending grew 1.0% in 2008, down from 2.2% in
2007. The sudden end to rampant spending had a huge impact on the world’s GDP, especially given the U.S. consumer’s central role in fueling global demand.
Market performance, another key driver of wealth, turned from challenging to devastating in 2008. Most key assets (equities, fixed
income, real estate and alternative investments) experienced a mediocre first-half at best. Then they were hit by a massive selloff, particularly in the fourth quarter, as investors fled to safe havens like cash, gold, and U.S. Treasuries. Many commodities and currencies—secondary drivers of wealth—also lost value in 2008.
Notable market events during the year included the following:
The global drop in equity-market capitalization was perhaps the most salient example of the severity of the crisis, as uncertainty and fear pervaded investor sentiment in every region. In the first half of the year, most equity markets lost value, though there were some notable exceptions. In Latin America, for example, the MSCI index rose 8.0%14, due mainly to the commodities boom. However, during the second half, and especially after mid-September, equity markets sank across the world—down 42.9% in the Americas, 53.5% in Asia Pacific, and 51.0% in EMEA (Europe, Middle East, and Africa)—for a global loss of market capitalization of more than $30 trillion.
Notably, some of the countries with the largest gains in 2007 posted the worst losses in 2008. China’s market cap was down 60.3% after a 291% increase the year before, and India was down 64.1% after rising 118.4% in 2007.
The rapid meltdown in equities occurred amid record levels of volatility. The CBOE Volatility Index, which many wryly dub “the Fear Index”, surged in mid-September 2008 to the same levels seen during the stock market crash of October 1987. The daily volatility of the Dow Jones Global Index (see Figure 8) did the same, and displayed levels comparable to those seen in the Great Depression of the 1930s. Those volatility levels dwarfed anything seen in the last 10 years, including the aftermath of the Asian financial crisis, the collapse of Long-Term Capital Management, the bursting of the Tech Bubble, and the September 11 terrorist attacks in the U.S.
Traditional attempts at equity diversification offered no respite, even to savvy investors, as the second half 2008 sell-off afflicted most regions, types of company, and industries. Data confirm that a more diversified equity portfolio, which would have helped investors in previous crises, would not have protected them in the last quarter of 2008. In comparing two versions of the MSCI World Index, one weighted by market capitalization and the other equally weighted (i.e., more diversified), we see that when the tech bubble burst, the more diversified portfolio lost 37% of its value, while the less diversified portfolio lost 48%. By contrast, the two indexes performed similarly in the late-2008 sell-off, and the more diversified index actually lost more value (41% vs. 38%16).
U.S. Treasuries outperformed every other fixed income security in 2008, increasing 13.9% on a total-return basis, as demand surged in a flight to quality.
The flight-to-safety was so intense that yields of short-term U.S. Treasuries actually dipped below zero in mid-December, when investors were primarily concerned with preserving their capital. Total returns on investment-grade corporate bonds were down nearly 7%17, while corporate junk bonds fell 23.5% in the US and 28.2% in Europe, their worst year on record, according to the ML US and Euro High Yield indexes.
Commodities rallied in the first half of 2008, when crude oil prices neared $150 per barrel, and gold reached $1,000 per troy-ounce. But, particularly after the collapse of Lehman Brothers, commodity prices sank, as investors started to liquidate positions in a shift to safer assets. The Dow Jones-AIG Commodities Benchmark plunged 55%18 from its peak in early-July of 147.6 points to 65.8 points in early-December, wiping out all the gains accumulated since 2002. Gold proved to be the exception, as it benefited from its attractiveness as a safe-haven holding, and prices posted a gain of 5.8% for the year. Moreover, although jewelry is still the predominant use of gold, uses of gold as an alternative to cash soared in 2008: Bar hoarding jumped by 60%, official coins by 44%, and Exchange Traded Funds rose 27%.
Real Estate losses intensified toward year-end. Real estate was another case in which a clear but steady downtrend in the first half of the year was dwarfed by sharp losses in the second. Housing prices fell in many nations in 2008, making it one of the worst real estate years on record.
Declines were evident worldwide, including Ireland (-11.8%), the UK (-21.3%), Hong Kong (-13.4%), South Africa (-7.8%) and Dubai (-11.0%), where residential unit sales were 45% lower in the fourth quarter than in the third.22 Luxury residential real estate prices also fell 25% on average globally.
The U.S. housing market continued to deteriorate, with a 19.5% loss for the year.24 However, real estate prices did remain constant or increase slightly in some countries, including Japan, China and Germany. REIT prices also ended the year sharply lower. After peaking at 1,574.9 at the end of February 2007, the Dow Jones Global REIT benchmark index declined steadily, to around 1,000 (base value) in July 2008, where it held until mid-September 2008. Thereafter, however, a heavy sell-off pushed the index down more than 50% in a matter of weeks. The index had bottomed at 474.5 points by the end of October 2008, and closed the year at 621.8 points.25
Hedge funds had the worst performance in their history in 2008, belying the theory that hedge funds naturally outperform in rough markets.
The fact that too many funds were holding a very similar asset base proved lethal once the equities sell-off accelerated at the year’s end. According to the Credit Suisse/Tremont Hedge Fund Index, leading hedge funds globally returned a loss of 16.7%. Moreover, hedge funds faced liquidity constraints, with hard-to-trade investments accounting for up to 20% of total portfolios of approximately $400 billion.
Assets managed by global hedge funds tumbled 25% to $1.5 trillion from nearly $2 trillion at the start of 2008. Nevertheless, some skilled managers were able to generate alpha despite adverse market conditions. The most successful strategies were Managed Futures, with an 18.3% cumulative return for the year, as well as Dedicated Short, which returned 14.9%.
During the first half of 2008, currencies such as the euro and the Brazilian real appreciated against the U.S. dollar (10.4% and 7.1%, respectively), while others remained stable (British pound, -0.1%), and a few lost value (Canadian dollar, -3.2%2). However, this trend changed drastically in the second half of the year, after commodities prices sank, and the global economic crisis worsened tangibly. Two significant second-half devaluations against the U.S. dollar were the Brazilian real (-46.2%) and the British pound (-38.0%). In late-2008, the U.S. dollar and the Japanese yen both surged, fueled in part by widespread purchases from investors unwinding currency carry trades.
In the process, the yen appreciated 14.9% against the dollar.29 The dollar also attracted buyers in the second half of 2008 when the U.S. started to look like a stronger economy than many of its trading partners.
Current conditions suggest any recovery will be slow, as the risis continues to permeate world economies. There is no clear consensus yet on when and how the global economy will recover, but there are certainly some key factors required:
The majority of economists agree the U.S. recession will end in the third or fourth quarter of 2009.30 However, while there have been some initial signs of growth following government intervention, the outlook for longer-term growth will depend largely on private-sector activity. Moreover, U.S. private consumption is imperative for a sustained, long-term global recovery as the U.S. to date has fueled approximately one-fifth of world GDP—more than any other economy by far. Economists expect unemployment to increase throughout the rest of the year and only begin to dissipate in 2010.
China has shown some increased signs of growth, mainly due to its domestic stimulus spending (a $585 billion package announced in November 2008). China’s stock market rose 8.4% during the first few months of 2009, outperforming all G7 economies.31 However, the private sector seems to have had a more significant contribution than in the U.S., with a rise in car and housing sales suggesting increased confidence in the domestic Chinese economy. These positive signs are also important for the global economy, as China’s renewed appetite for products, particularly raw materials, would help other economies. However, these signs should be treated with caution, since Chinese exports are still declining, global demand remains low, and global unemployment, particularly in Asia, continues to rise.
The road to recovery, according to the Merrill Lynch Wealth Report, will require close cooperation among countries, given the enduring interdependence among global economies. For example, creditor nations may be able to sustain themselves on their surpluses in the short and mid-term, but they will eventually need the force of fueling economies, including the important private-consumption component, to help resuscitate global and local demand in their economies, and reduce global imbalances.
Similarly, while in the past the BRIC nations were viewed together as decoupled engines of global GDP growth, Brazil and India will likely support global growth, rather than fuel it, in the current environment, and Russia is expected to require a longer period of repair before it can regain its pre-crisis growth levels.
One of the fundamental drivers for economic recovery is credit availability—which is heavily dependent on banks’ balance sheets. Although some key indicators of the banking system, such as the TED33 spread, have improved considerably, they are still at worse levels than before
the crisis. Furthermore, it is not clear how much time it will take banks to complete the shedding of toxic assets, but it will be difficult for them to extend significantly more credit to the private sector until they do. And without credit availability, it is much more
difficult for the private sector to resume taking the risks necessary for a sustained global recovery, such as increasing employment, business investments, and taking up loans.
Financial authorities and regulators from around the world quickly harmonized their calls for a global response to a global crisis. The Group-of-
Twenty (G-20) Finance Ministers and Central Bankers pledged in April 2009 to act to restore confidence, growth, and jobs, repair financial systems to restore lending, and strengthen financial regulation to rebuild trust.
However, it remains to be seen how governments will respond to politically sensitive issues (e.g., government spending, taxation, protectionism, regulation) that will arise in driving growth. A meaningful recovery of the global financial system is not expected before 2010, which underscores the importance of governments, regulatory agencies and financial institutions getting fiscal, monetary and macro-economic policies right.
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