Rise of the super-rich amid gloom

Biz@India

March-April 2014

Though the Indian economic conditions are dreary, the ultra-high net-worth individuals are getting richer and many more are joining the exclusive club. Luxury companies have been devoting much of their marketing budgets to stoking UHNWI’s aspiration and the role of wealth managers have come into effect to guide the UHNWIs on long-term investments.

The Indian economy is clearly in trouble. In 2013, it registered its slowest growth for nearly 15 years, fighting several ills at the same time – low growth, high inflation, low confidence and very low optimism about a quick change in the fortunes.

In sharp contrast to the prevailing economic mood in the country, some segments of the business continue to flourish. Even while the automobile industry saw second year of declining sales, after an unprecedented boom for over a decade, the market for luxury cars – costing $50,000 or more, continued to expand at a brisk pace. Attracted by the boom, all the players in this segment – Ferrari, Maserati, Lamborghini, Aston Martin, Porsche – have set up shop in India.

Luxury cars are not the only segment growing at an envious pace. Practically anything to with luxury has been selling like hot cakes in the country as the country’s booming class of millionaires – nouveau riche and the traditional family wealth – continue to splurge on real estate, jewellery, branded goods, etc.

What is driving this growth is not just that the super-rich in India have continued to do rather well for themselves, but also that despite the economic crisis, more people are joining the club of ultra-high net worth individuals (UHNWIs) in the country. According to some estimates, there are at least 200,000 people with a disposable income exceeding $1 million.

After a steep decline in 2011, the numbers of HNWIs rose sharply, by 22.2 per cent and their wealth by 23.4 per cent. As against 84,000 HNWIs in 2008 and 125,000 in 2011, India was home to 153,000 such individuals in 2012. Altogether, these Indians were worth $589 billion. The number of super-rich is subsequently is believed to have risen close to 200,000.

Concrete preferences

Though their spending patterns have evolved over the years in the different segments, the focus continues to be real estate. According to an annual survey conducted by technology giant, Capgemini, and RBC Wealth Management, Indian HNWIs invested most in real estate (26.5 per cent). The balance of portfolios was allocated to cash and deposits (22.7 per cent), fixed income (17.7 per cent), equities (17.4 per cent) and alternative investments (15.8 per cent). Allocation to alternative investments at 15.8 per cent was the highest in Asia-Pacific.

Booming stock markets across the world was one of the reasons behind the spending boom of the HNWIs. Capgemini and RBC Wealth Management’s 2013 World Wealth Report (WWR) said the Global MSCI Benchmark Index increased 13.2 per cent, with robust performances by Germany (27.2 per cent), Mexico (27.1 per cent) and India (23.9 per cent). It said in India, reform measures and monetary easing helped equity markets gain by 23.9 per cent.

The wealth growth was strongest in Asia-Pacific at 12.2 per cent, followed by North America at 11.7 per cent. “The fastest-growing HNWI markets are located in Asia-Pacific. Hong Kong experienced a 35.7 per cent increase in its population of HNWIs, propelled by a combination of relatively less conservative investing behaviour among many HNWIs and strong equity markets. India, with 22.2 per cent growth, benefitted from positive trends in equity market capitalisation, gross national income, consumption and real estate. Both Hong Kong and India, which are notoriously volatile, overcame their poor performance in HNWI population growth in 2011 – Hong Kong lost 17.4 per cent, while India lost 18 per cent,” says the report. More than half the global population of HNWIs continued to be concentrated in the US, Japan and Germany. For the past three years, individuals in these countries accounted for roughly 53 per cent of all HNWIs, down from 54.7 per cent in 2006. However, the market share of these countries is expected to erode over time as emerging markets increase in prominence.

“Asia-Pacific is expected to become the largest HNWI wealth market as early as 2014. Asia Markets are expected to expand annually by 10.9 per cent and 9.7 per cent respectively through 2015. HNWI population and wealth reached record levels in Asia-Pacific in 2012, propelling global growth. Since 2007, Asia-Pacific has increased its HNWI population by 31 per cent and its wealth by 27 per cent, well in excess of the rest of the world increases of 14 per cent for HNWI population and nine per cent for wealth,’’ says Jean Lassignardie of Capgemini Global Financial Services.

APAC of growth

The Asia-Pacific region today counts 3.68 million, with a combined wealth of $12 trillion. “GDP growth of 5.5 per cent which is more than double the global average, combined with strong equity market performance across the region and strong real estate market performance in some markets, drove robust growth in Asia-Pacific’s HNWI population and wealth in 2012,” says Lassignardie.

He goes on to add that global HNWI wealth is forecast to grow by 6.5 per cent annually over the next three years with the Asia—Pacific region projected to grow at one and a half times the global average at 9.8 per cent and is expected to lead global growth.

“Despite a marked focus on capital preservation and high cash allocations, high net worth individuals achieved a record level of wealth in 2012, suggesting further growth lies ahead if trust and confidence in the markets increase further,” says M George Lewis, Group Head, RBC Wealth Management and RBC Insurance

.Meanwhile, according to the report, art market continued its recovery with strong growth in emerging markets, especially China, Brazil and UAE. But, unlike their counterparts from China, Brazil and other developing economies, the Indian HNWIs remained reticent about investing in art. This is perhaps because of the fact that the Indian investors are still at a nascent stage in terms of art buying and hence they do not allocate much of their portfolio into art compared to other emerging markets. HNWIs in India allocated the highest to jewellery, gems, and watches (44.3 per cent) compared to Asia- Pacific, excluding Japan average of 33.5 per cent – art got 15 per cent and other luxury collectibles 20 per cent.

Nearly 70 per cent of the Indian HNWI population is in the age group of 30-55, which has long term investment plans and thus requires financial planning and advisory asset management. While around 39 per cent of the HNWI wealth has been accumulated on the basis of business income, leading to demand of tax planning solution which can help to protect wealth and mitigate risk. Indian HNWIs have a limited understanding of the risk and returns associated with investment products and thus require personal attention and assurance from wealth managers which has led to a growing importance of face to face relationship management.