• What does it indicate?

The report gives an insight into the dynamics of macroeconomic factors driving the economy through the prism of changing paradigm of high net worth individuals’ (HNWI) investment patterns and growth. HNWIs are well informed of the present and approaching economic conditions and so they capitalise on this information by reallocating their investments to garner maximum returns out of the market trends. The report attempts to capture this shift in their investment behaviour and pans out to the larger picture of where the global economy stands and is heading.

• How have HNWIs grown?

As per 2006 figures, the population of HNWIs stands at 9.5 million — a growth of 8.3 per cent over the previous year. This increase was particularly strong in developing and less developed economies indicating a boom in economic activities worldwide. The HNWI population grew by 12.5 per cent, 11.9 per cent and 10.2 per cent in Africa, the Middle East and Latin America. The gains came riding on these emerging markets’ attempts to strengthen their infrastructure to join the league of more developed economies. Together, these HNWIs had about $37 trillion of wealth.

• Where does India fit in?

In many places. For one, the number of HNWIs in India rose 20.5 per cent in 2006 — the second highest in the world — crossing 100,000. India is also part of three groups that have outperformed world averages: BRIC (Brazil, Russia, India and China) nations, emerging economies and Asia-Pacific. NRIs also find a mention in the report. They are a “key market segment” in Asia-Pacific.

• What is the larger picture here?

Booming economy and market capitalisation are two key factors behind the growing populace of HNWIs. The rise in oil prices in the first half of 2006 helped GDP growth in oil-producing nations whereas the subsequent fall benefited the oil importing nations. This, along with a fairly controlled inflation, saw GDP growth worldwide rise to 5.4 per cent, compared with 5 per cent posted in 2005. The growth story has been particularly strong in emerging markets. In 2006, China and India, for example, sustained real GDP growth rates of 10.5 per cent and 8.8 per cent.

Market capitalisation also strengthened the growth story. Europe, Asia-Pacific and Latin America were driven by strong corporate profits, IPO activity and ongoing foreign investment, which attracted foreign investors to invest more heavily in these markets in 2006. In Asia, for instance, the Shanghai/Shenzhen market capitalisation grew by 220.6 per cent in 2006, mainly on the strength of IPOs. South Africa, Venezuela and China were among the best performers. The boom in IPO activity was primarily due to the fact that monetary policy was tight in most regions of the world leading firms to raise capital from the public.

• How have the wealthy reacted?

While the growth in the economy explains the surge in HNWIs, their changing asset allocation explains where the growth has parked itself. The fact that equities are and for sometime will remain a key asset class for investors comes out clearly in the report. However, even though equities held the maximum allocation — 31 per cent — real estate was seen as the emerging asset class in 2006. While the share in equities moved just 1 percentage point up over the previous year, real estate saw the allocation rise from 16 per cent to 24 per cent.

The reason for this shift has been due to the increase in commercial real estate prices coupled with great returns from real estate investment trusts (REITs). This resulted in a reduction in alternate investments — structured products, hedge funds, derivatives, foreign currencies, commodities, private equity and investment of capital — to almost half to 10 per cent in 2006 from 20 per cent in 2005.

• What is the emerging need?

Robust and efficient advisory services, an impediment that has been recently addressed by the UK and India, certainly needs attention. With complex financial products and growing volumes of wealth, wealth management firms and advisory units have to revisit their service models by client segmentation, adoption of more advanced tools that would enable knowledge gathering, analysis and delivery to forge long term relationships with HNWI clients.

• What is the forecast?

For the future the report throws indications of a slowdown in the GDP global growth rate to 4.8 per cent in 2007 and 2008, from 5.4 per cent in 2006. This would primarily be due to the moderation in the growth of mature markets, a phenomenon that would trickle down to other markets as well. Tightening of monetary policy would also contribute to this slowdown. In terms of asset allocation, even though equities would remain on top, alternative investments would rise to 13 per cent by 2008. The global HNWI financial wealth is expected to grow to $1.6 trillion by 2011 at an annual rate of 6.8 per cent.

deepti.bhaskaran@expressindia.com