The new habits of the world’s wealthiest people

While academics and experts differentiate between real estate and equities, when I step back, I find the two asset classes behave pretty much the same way. For the purpose of investment, both are risky in their own ways (real estate more so in India, at least till titles are clear and contracts enforceable without the help of goons) and both deliver returns that over the long term exceed risk free returns. For the past three years, as we have seen, property prices have doubled and trebled quite like stocks.

Keeping this risk-return background in mind, the risky allocation of the wealthy rises to 55 per cent — more than half their wealth is invested in risky assets. But the multiple returns in both these asset classes has ended and should now converge towards a more reasonable number. It is not surprising, therefore, to see the Wealth Report keep the equity allocation stable at 31 per cent and lower the real estate allocation by a sixth to 20 per cent in 2008. The combined allocation is still above 50 per cent.

Interest rates seem to be peaking across the world and India is no different. While there is a whole school of thought that believes US interest rates will rise further, pushing rates globally as Central bankers across the world benchmark their monetary policies around it, the prospect seems unlikely. But for the purposes of wealth management, even if rates rise further and liquidity gets absorbed from the world’s financial system, all that will change would be the allocation of money, which will move from high risk to low risk assets. It will also move towards fixed income assets because when interest rates fall, the value of the underlying asset rises, making it a low risk, high return investment. The Wealth Report projects that in 2008 fixed income allocation will rise by 2 percentage points to 23 per cent.

With cash and deposits falling by 1 percentage point, the biggest gainer in 2008 is expected to be alternative investments — structured products, hedge funds, derivatives, currencies, commodities, private equity and venture capital and “investments of passion”. The last includes luxury collectibles (cars, yachts, aircraft), jewellery, art, sports-related investments (professional teams, sailing, race horses), collectibles (wines, antiques, coins). To all that I have just a one-word comment: Well…Accelerated growth of GDP and market capitalisation, the report says, are the two drivers of wealth creation. In India both are on the rise, turning in trillion-dollar numbers. Put these alongside the asset allocation of the wealthy and you’ll know just how they got there and how perhaps the rest of us can.

Tailpiece

To see consumers in the most developed of markets — the US, the UK, the EU, Australia and so on — being exploited pretty much the same way as we in India are is both a disappointment as well as an opportunity. The disappointment comes because even as India readies itself to arm regulators with new powers to regulate distributors, agents and those selling financial products, there is no benchmark in sight. In the UK, the Financial Services Authority (FSA) notes in a paper released on Wednesday, British consumers of financial products face the same problems of misselling. Meaning, regulators in developed markets have to address the same dilemmas of managing the last, bumpy mile in financial services delivery as Sebi and IRDA in India do. The opportunity is that India can set standards and laws that become global benchmarks.