Asia will leapfrog Western Europe to be the second-biggest wealth market in 2022 if current growth rates endure, while North America will stay top of the hill, according to the 20th edition of the annual report on the sector.
BCG, looking back over the past two decades, noted that the underlying story – despite preoccupations with COVID-19 – is a vast increase in wealth and the ascent of emerging market countries, with Asia leading the charge. Personal financial wealth stood at $226.4 trillion at the end of last year, rising from $80.5 trillion at end-1999.
That shift explains why wealth management - private banks, family offices, advisors, trust companies and other entities - have been on a rising escalator, becoming more visible parts of the financial sector. Once relatively obscure and not widely reported on, the sector is more likely to make the news front pages. The rise in wealth has also put certain financial hubs in the limelight, including those under the “offshore” tag, such as Switzerland, the Channel Islands, Singapore and Hong Kong.
Emerging, younger economies have grown rapidly over the past 20 years, taking a larger chunk of the global total. In 1999, for example, Asia and other growth regions accounted for 9.3 per cent of global wealth. By 2009, that share had jumped to 17.3 per cent; and by the end of 2019, it had grown to 25.3 per cent of global wealth.
Greater economic attainment has enlarged the ranks of the world’s wealthy. The number of millionaires (in US dollars) globally has nearly tripled in the past 20 years, from 8.9 million in 1999 to more than 24 million by the end of 2019. Collectively, millionaires now hold more than 50 per cent of total financial wealth globally (calculated on the basis of nominal growth rates and not taking into account inflation effects).
North America still rules – for now
North America continues to have the largest number of millionaires (16.4 million) - more than half of whom (10.3 million) became millionaires during the 21st century. North America is also home to the greatest concentration of high net worth (HNW) individuals. This segment now accounts for 59 per cent of the wealth in North America ($59 trillion).
Asset allocations contributed to different rates of wealth growth across segments over the past ten years. The HNW segment and the ultra HNW (UHNW) segment - individuals with a total financial wealth of more than $100 million - prospered the most. Because their portfolios comprised a much higher share of equities than other wealth bands (more than 50 per cent are invested in equities and investment fund shares, on average), they were well positioned to reap the gains from the recent long bull market.
By contrast, the retail segment – individuals with assets of less than $250,000 - invested, on average, only about 9 per cent of their assets in equities and investment funds, with more than 80 per cent going instead into cash and deposits and life insurance and pensions. That low rate of investment translated into lower rates of wealth growth for this segment.
Future
BCG said that its models suggest that wealth across Asia, excluding Japan, will grow at between 5.1 per cent and 7.4 per cent annually over the next five years. “Should that forecast hold, Asia will overtake Western Europe as the second wealthiest region in the world by 2022. Wealth in North America, which is more heavily weighted toward equities, could grow at –0.6 per cent to 3.7 per cent annually from 2019 to 2024, depending on how severely the COVID-19 crisis damages the global economy,” the report said.
For Western Europe, BCG projects a steadier growth range of wealth growth of about 1.6 per cent to 3.6 per cent, given the region’s heavier weighting toward cash and deposits, which are less volatile than equities. Because average GDP in the region over the next five years is expected to be lower than the average for the past 20 years, wealth growth in the region is unlikely to eclipse that of North America, it said.
BCG predicts that HNW and UHNW populations will remain the fastest growing segments in North America and that the affluent band will be the fastest-growing segment in Asia, Western Europe, and the Middle East. In Asia, affluent individuals will see their wealth rise by a compound annual growth rate of 6.0 per cent to 8.7 per cent over the next five years (totaling from $5.7 trillion to $6.5 trillion by 2024).
Cross-border, geopolitical angst
Cross-border wealth surged over the past 20 years, growing from $3.1 trillion in 1999 to $9.6 trillion in 2019.
“Past crises have usually led to a short-term increase in cross-border capital flows. Whether the COVID-19 pandemic will lead to a similar shift depends on how severely the fallout impacts business liquidity, whether certain markets suffer economic and political instability, and whether governments enact stiffer tax measures to cover the costs of their crisis interventions.
The report’s authors think that as a result of instability and political worries, investors are likely to consider moving assets to perceived safe havens. Despite such inflows, cross-border wealth will fall by 5.4 per cent to 10.2 per cent in 2020, driven by the performance of the capital markets.
Over the medium term (2021 to 2024), investors may look to repatriate assets to make it easier to get their hands on money, especially if the economic downturn follows a “lasting-damage scenario”, the report said.
“Regional cross-border wealth patterns are changing as well. In 1999, for example, Western Europe represented almost 50 per cent of all cross-border wealth globally. As of 2019, that share had declined to 24 per cent and will drop slightly below 20 per cent by 2024. By contrast, Asia’s share of cross-border wealth is set to reach 40 per cent by 2024. The Middle East and Latin America are also expected to see their share of cross-border wealth grow slightly faster than the global average over the next five years.
The BCG report noted that Switzerland remains top of the cross-border tree, holding $2.4 trillion of such money in 2019, ahead of Hong Kong at $1.9 trillion; Singapore at $1.1 trillion; the US at $800 billion (Delaware structures, etc); the Channel Islands ($500 billion); the United Arab Emirates ($500 billion); Luxembourg and the UK both at $300 billion.
“From a booking center perspective, Switzerland remains the largest destination, accounting for approximately one quarter of global cross border wealth. Hong Kong is catching up, however, as a result of rapid growth in assets from wealthy individuals in China and other parts of Asia. These individuals currently account for 17 per cent of global cross-border wealth. Singapore is the third-largest hub for cross-border wealth, with total bookings in 2019 exceeding $1 trillion,” the report said.
Singapore is also likely to benefit from the continuing influx of Chinese wealth. While the protests in Hong Kong that began in 2019 have had no significant effect on cross-border assets so far, ongoing turbulence could encourage wealth flows to shift toward Singapore and other cross-border centers,” it added.
