Gulf region's rich thrive in chaos
Since the downturn first reared its ugly head in 2008, most working people have struggled to pay bills, keep up with mortgage payments and retain their jobs. But the Middle East's richest residents have hardly broken sweat over such trivial matters, the latest study on global wealth by the Boston Consulting Group shows.
In its report, Shaping a New Tomorrow: How to Capitalize on the Momentum of Change, BCG revealed wealth among millionaire households - people with assets worth at least US$1 million (Dh3.63m) - last year increased 8.6 per cent in the Middle East to $4.5 trillion last year. The global management consultant's study also said the figure would climb 8 per cent to $6.7tn by 2015.
Other findings from the report show that Saudi Arabia, Kuwait, Qatar and the UAE were among the world's top 10 countries for highest density of ultra-high-net-worth households - families that have more than $100m assets under management. Saudi Arabia came out top with 18 ultra-wealthy millionaires per 100,000 households, while Kuwait and the UAE and ranked fourth and 10th respectively.
Qatar, Kuwait and the UAE were also in the top 10 countries for the highest proportion of wealthy people by market, registering 8.9 per cent, 8.5 per cent and 2.6 per cent of millionaire households respectively.
"The results are not surprising," says Sven-Olaf Vathje, a partner and managing director at BCG Middle East. "Given the demographics and overall wealth of these petroleum-rich countries, we would expect a higher proportion of ultra-high-net-worth households than in other parts of the world.
"Growth in assets under management also reflects the strong fundamentals of the region, driven by continuing strong petroleum prices. Nevertheless, the risk appetite of regional investors remains low, especially when compared to levels seen before the downturn. The asset allocation of GCC high-net-worth individuals remains overweight in cash and capital-protected products."
While heartening for millionaires based in the Middle East, BCG's research does point to a period of brief turbulence. The number of households with at least $1m in assets dropped during the height of the financial crisis, with investment portfolios among some wealthy individuals succumbing to the harsh economic conditions.
But despite losing their millionaire status amid the crash, Mr Vathje says most wealthy individuals have since bounced back and recouped their losses. "We did see the number of millionaires come down because they were exposed to the equity markets," he says.
"But the percentage of millionaires in the region only came down slightly and those who lost their status have gained it back because the assets they were holding during and after the crisis have recovered."
Globally, wealth among millionaires increased by 8 per cent to $121.8tn last year - some $20m more than in 2008, when the downturn began. Of that number, the Middle East accounted for approximately 4 per cent, led by Saudi Arabia with 2.1 per cent of the region's wealthy households.
The Middle East may account for a small percentage of the world's millionaire households, but it still represents a potentially lucrative market for wealth managers. The competition among private banks to tap into the $4.5tn of assets in this region is fierce, with private banks offering a range of products to entice potential clients across various demographic groups - particularly women.
The BCG report shows that 22 per cent of the millionaire households across the region are occupied by females, which explains why they are increasingly being targeted by local wealth managers.
Whether those women or other rich individuals feel confident about dealing with certain wealth managers is another matter. Since the downturn, asset managers have found it increasingly difficult to convince millionaires their cash is in safe hands. "Interest in the quality of the wealth manager is an issue that has come up quite significantly since the downturn," Mr Vathje says. "Before the financial turmoil, we had many years of continued growth from 2001 to 2007, with financial markets seeing steady development, so no one was thinking much about the quality of their wealth manager.
"But that has changed and there are a lot of questions being asked now more than three years ago, like, 'Do I have the right private bank?' Investors in the last two years have split their portfolios across different banks to test the waters and check which horse is running the fastest."
Markus Massi, another partner and managing director at BCG Middle East, adds: "It's two areas that people are looking at: the wealth managers and the individual products that they provide, so customers ask themselves whether they understand what they're buying and what the product involves. Three or four years ago, they would have just followed the advice of their private banker."
Another trend to emerge from the report is the almost 50-50 per cent distribution of assets between onshore and offshore (where the investor has no legal residence or tax domicile) investments. Most onshore capital is tied up with private banks, while offshore assets are spread across international equity markets and bonds.
Dubai remains the most prominent offshore centre in the Arab world, with non-taxable, non-domiciled financial products particularly popular among residents of Saudi Arabia, Turkey, Iran and Kuwait.
"The recent unrest in the region has reversed the trend towards 'onshoring' wealth in some countries in the Middle East. For the more stable Gulf states, however, the onshoring trend continues," Mr Massi says. "Some Gulf jurisdictions, for example, Dubai, are now attracting more wealth from other Middle East countries as they act as offshore centres themselves."
Wealth among the region's millionaires may have grown in 2010, but it appears their interest in Sharia-compliant investments is still relatively low. A separate BCG study on the behaviour of Muslim investors found only 25 per cent to 30 per cent of the population had Sharia-compliant assets (products that uphold Islamic principles, with no links to gambling, undue risk or businesses dealing in forbidden industries that involve alcohol or excessive borrowing) under management.
Of those who did subscribe to Sharia-compliant products, many said they would choose Islamic investments even if they were less professional than standard financial offerings. But they also admitted to thinking twice if an Islamic investment made them less money. "Many of these people may be open to Sharia-compliant banking, but they would not sacrifice yields," Mr Vathje says. "If an Islamic product is yielding less, they will go for conventional products."
It remains to be seen whether Sharia-compliant investments increase in popularity during the next two years. But there appears little doubt about the Middle East producing more millionaire households within the same period if the BCG's forecast of an 8 per cent rise in assets under management to $6.7tn by 2015 proves accurate.
The management consultancy says wealth distribution, in which parents hand over assets and investments to their children, will contribute to the rising number of affluent individuals. Additionally, economic diversification programmes will help to swell the millionaire ranks in the coming years.
"One of the drivers is the continuous economic diversification programmes we see in the region, with governments bringing oil revenues into play to develop other industries," Mr Vathje says. "That will create entrepreneurial opportunities and attract talent from abroad to work in these new industries.
"In terms of industries likely to grow as a result of economic diversification, health care and education will see a lot of investment, which will result in new hospitals and schools being built, creating more activity in both sectors."
Meanwhile, Saudi Arabia, the UAE and Kuwait are expected to retain the region's most millionaire households, currently at a total of 66 per cent. The upshot, Mr Vathje says, is existing wealth-management companies will continue developing their respective operations in those countries, while new operators are expected to emerge. "These countries are where most of the region's millionaires are, so it makes sense for wealth managers to focus on them."
Updated: June 17, 2011 04:00 AM