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Key Takeaways from the Merrill Lynch Wealth Report 2009: How The Rich Invest
October 20, 2009

The 2009 Asia-Pacific Wealth Report from Merrill Lynch and Capgemini examines the investment behaviour of high net worth individuals (HNWIs) in the region. While most of the news focused on the declining number and asset value of HNWIs, this article is going to study the investment strategies mentioned in the report to provide additional insights to investors.


Author : iFAST Editorial Team



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Key Points:

  • The Asia-Pacific region is likely to recover faster than the rest of the world
  • From 2008 to 2018, China and India will be drivers of the region’s HNWI wealth
  • The wealth of the rich in Asian-Pacific is expected to rise for 8.8% annually, overtaking the global average of 7.1%
  • Asia-Pacific HNWIs are expected to adapt a more balanced investment approach in the long run

According to the report, the financial crisis triggered by US subprime problem indicates a tight integration between the Asia-Pacific region and the global economy. However, there are signs that the region is emerging relatively faster from the global slump and will ultimately suffer less from the crisis than the rest of the world.

 

Chart 1: Real GDP Growth Rates, Financial Year (FY) 2007 - 2009

ASIA-PACIFIC'S RECOVERY OUTPACES THE WORLD IN 2010

Asia-Pacific’s GDP is expected to contract 0.9% in 2009, less than the 2.7% contraction forecasted for the world’s GDP, says the report. The region’s recovery is also expected to outpace the world’s in 2010, with a growth of 3.5% that outperforms the forecast of 1.6% growth for the world.

Merrill Lynch believes that China will register a growth of 8.0% in 2009. The key driver of this growth is the country’s 4 trillion yuan stimulus package and its surging bank loans. In addition, the report also mentions that, while Indian economy is undermined by the below-normal monsoon rains, the fiscal stimulus launched by Indian government will be a significant support to its economy. Kotak Mahindra Mutual Fund had shared a similar view in our previous article Where to invest amid choppy markets in India!.

Merrill Lynch also believes that the business environment in China and India is likely to improve significantly during 2009-2013. For example, according to the Business Environment Rankings (BER) of the Economist Intelligence Unit, China ranks 11 places higher for 2009-2013 than it did for 2004-2008 which is largely attributed to the relative strength of the country’s underlying economy. Although declines have been shown in the rankings of Singapore and Hong Kong, they still retain their dominant positions in the region. Governments across the Asia-Pacific region are also looking to improve their business environment in an effort to increase foreign direct investment (FDI) and support their economies.

Chart 2: Breakdown of Asia-Pacific HNWI Financial Assets, FY 2006-2010

Moreover, jobless rates in the Asia-Pacific region have remained lower than in other regions. Efforts to increase employment are underway, helping to underpin the region’s independent economic recovery. For example, the Singapore government introduced a special Risk-Sharing Initiative to encourage bank lending and increase access for small and medium-sized enterprises (SMEs) to credit.

An improvement in employment can definitely enhance regional demand. What’s more, the report points out that China and India is experiencing the highest domestic-demand growth in the Asia-Pacific region, which is forecasted to grow at a compound annual growth rate of 9.7% and 7.9% respectively during 2009-2013. The region is expected to focus on domestic-demand to reduce its reliance on exports of goods and services for growth. At the same time, an appreciation of the domestic currencies of Asia-Pacific countries would also increase real household income, drive consumption and reduce the region’s reliance on external demand.

EXPECTED ANNUAL GROWTH IN ASIA-PACIFIC HNWI WEALTH: 8.8%

Brazil has won the right to host 2014 FIFA World Cup and 2016 Olympic Games, drawing investors’ attention to Latin America. However, the report claims that markets such as China and India are forecasted to grow not only faster than their peers within the Asia-Pacific region, but also outpaces Latin America. A pick-up in investor risk appetites is likely to stimulate the region’s HNWI wealth growth. Merrill Lynch estimates the compound annual growth of Asia-Pacific HNWI wealth as 8.8% from 2008-2018, above the global average annual growth of 7.1%.

The Asia-Pacific HNWIs has suffered from huge asset loss brought by the financial crisis, hence their investment approach tends to be conservative by increasing their asset allocation on real estate holdings and cash (see Chart 2). However, they are expected to adapt a more balanced investment approach in the long run. The portion of structured products and hedge funds will be reduced, while fixed-income securities will take up a bigger part of their holdings.

A MORE BALANCED INVESTMENT APPROACH

Merrill Lynch expects Asia-Pacific HNWIs to increase their exposure to risky assets again in 2010 and they will take advantage of the buying opportunities as the equities markets rebound. However, they are also expected to seek a balanced investment approach and maintain liquidity while buying equities by increasing the allocation of fixed income and cash.

In the short term, domestic and home-region investments remain favourable for the Asia-Pacific HNWIs. However, as markets in other regions start to recover from the financial crisis, they might gradually increase the weight of mature markets in North America and Europe in their asset allocation to hedge out investment risks through geographic diversification.

CONCLUSION

Fundsupermart believes the significance and merit of long-term investment and a diversified portfolio construction in building up your wealth. The 2009 Asia-Pacific Wealth Report has specified the important roles of Asia-Pacific, China and India in the growth of global wealth. Besides, after the subprime crisis, the Asia-Pacific HNWIs has adapted a more balanced investment approach by increasing their allocation on fixed-income securities (e.g., debt funds) as well as building a more diversified portfolio. If you are yet to find out your own investment strategy, it always pays to learn a bit more about how money works for the rich.

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