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The economy may not be as vibrant as it was a few years ago. Yet by some measures, wealth is back. Rooms at luxury hotels are filling up with a resurgence in business travel. Retailers such as Saks (SKS), Hermès (RMS:FP), and LVMH Moët Hennessy Louis Vuitton (MC:FP) reported sales gains in the first quarter as the superrich took up spending again. By the end of 2010, global sales of luxury goods should be up 4 percent year-on-year, compared with the 8 percent drop seen in 2009, say projections from consulting firm Bain & Co.
Global wealth has returned to 2007 pre-crisis levels, largely because of the recovery in stock and bond markets, according to a new study by the Boston Consulting Group. Assets under management—investable assets that do not include the money in investors' own businesses, real estate, and luxury goods—increased by 11.5 percent, to $111.5 trillion last year, the report found. Wealth also grew more concentrated: Millionaire households, which represent less than 1 percent of all households, owned 38 percent of the world's wealth last year, up from 36 percent in 2008.
The beneficiaries of this uptick in wealth include entrepreneurs and individual investors, who saw their net worth rebound after the financial freefall of 2008 and early 2009, says Greg Skidmore, president and chief investment officer for Belray Asset Management in Greenwich, Conn. "Business owners have been really quick to change their businesses to adapt to the environment," Skidmore says. "They have been reinvesting in their businesses and finding new opportunities."
As the markets bump up and down on the long path to stabilization, the Boston Consulting Group expects global wealth to increase by an average of 6 percent annually through 2014. Still, cautions Peter Damisch, a BCG partner and co-author of the new wealth report, the growth should not be seen as a return to business as usual, especially for wealth managers. Ultrahigh-net-worth clients are still hesitant to move back into high-profit products and equities and are seeking more information, personal advice, and transparency, he says. To meet these new demands, banks are training relationship managers and developing new processes and products.
In the next several years, high jobless rates and macroeconomic issues will limit recovery in markets around the world. Even as economic hardships continue, those with money to invest have found opportunities. "The new realities will produce new winners and new losers, depending on how able people are to deal with new challenges," says Damisch.
According to BCG's report, North America saw the biggest absolute gain in wealth: up by $4.6 trillion, or 15 percent, year-on-year. Asia-Pacific saw the biggest jump at 22 percent, or $3.1 trillion. Damisch says that while he is moderately optimistic about the development of wealth in Europe and North America, he is far more optimistic about activity in growth economies such as those in the Middle East, Asia, and Latin America.
BCG expects the Asia-Pacific region, excluding Japan, to grow at nearly twice the global rate. While the U.S. hosted the largest number of millionaire households—more than 4.7 million—the firm's study found the greatest concentration in Singapore, where more than 1 in 10 households had assets worth more than $1 million. Singapore also ranked first among the surveyed countries for growth in millionaire households, with a 35.4 percent increase, year-on-year.
Tjun Tang, a BCG partner and co-author of the report, explains that the growth in Singapore resulted from so many households having already been on the verge of millionaire status in 2009. The island nation's high savings rate and the rebound in investments helped many make it across the line. As a result, Tang says, the country has a greater proportion of midwealth millionaires, compared to places such as Hong Kong, China, and India, where there are more wealthy tycoons.
China saw the second largest jump, 30.7 percent, to reach 670,000 millionaire households. Chinese entrepreneurs have been big beneficiaries of strong economic growth, says Tang. New wealth is being created in China's infrastructure, technology, consumer, and retail sectors—priority areas for the government—in addition to such traditional areas as manufacturing, export, and real estate.
On top of these increases, there might be as-yet-undiscovered wealth, particularly among high-net-worth individuals. Steve Crosby, PricewaterhouseCoopers' head of wealth management, says that his recent research revealed more wealth than had been previously identified. PwC estimates that as of April, there were more than 3.6 million people in the U.S. with more than $5 million in investable assets; in China, there were almost 800,000. "This does not mean that wealth suddenly appeared, but it does point out that prior studies may not have captured the depth of wealth—particularly family wealth."
Investors wonder if the wealth that returned in 2009 will linger. As problems persist in the U.S. real estate market, European debt has skyrocketed and unemployment rates in developed economies are high.
Fears of a double-dip recession are "overblown," according to a global forecast published by Morgan Stanley on June 10. "[A] double-dip recession and resulting deflationary pressures that many worry about right now are definitely not at the top of our worry list," the report states. Morgan Stanley says monetary policy has been accommodative worldwide and that problems in Europe will lower medium-to-long-term potential growth, rather than cause a sharp cyclical downturn from one quarter to the next. The firm expects gross domestic product growth—a driver of increasing wealth—to rise 4.8 percent globally in 2010.
If this forecast pans out, where will the wealth sprout in 2010? In the U.S., Philip DiGennaro, an attorney at law firm Withers Bergman in New Haven, Conn., says clients are focusing on investing in newer, smaller, and more unique opportunities in technology, social media, and cleantech.
Belray's Skidmore says that as clients recruit and develop talent for their businesses, they are also investing in equity markets and taking advantage of real estate opportunities. "While there is still a lot of negative news on real estate in the U.S., the market is telling us that valuations are beginning to rebound," he says. "Our clients are more confident in that asset class."
Wealth is generated on a cyclical basis, Skidmore adds, and the longer we have a series of bad returns, the more likely we'll have a period of good returns. "We're due for a few real good years," he says.
Click here to see the countries with the most millionaires.