Show me the money! In Europe, it’s in Germany, France and Russia

The latest buzzword in wealth management these days is ‘decoupling,’ because most of us in the normal world are still dealing with the effects of the pandemic crisis.

But the world of high net worth individuals (HNWI) has “decoupled with the real economy,” the latest edition of Cap Gemini’s World Wealth Report, released on Thursday, informs us.

While the real economy struggled, stock markets saw record gains, and this has caused the global HNWI population to increase by 6.3 per cent, and the wealth of this population to increase by 7.6 per cent, according to the report.

And – talk about decoupling – the ultra HNWI segment gained even more to grow 9.6 per cent in population and 9.7 per cent in total wealth.

Why should we care about what happens to very rich people?

Because the top 1 per cent of the population, in wealth terms, owns 43 per cent of all global wealth today, according to a Crédit Suisse report.

“The contrast between what has happened to household wealth and what is happening in the wider economy can never have been more stark,” the report notes.

With nearly half of all money in the hands of 1 per cent of the population, those of us in business need to think about how that affects us in terms of strategy and marketing.

So, let’s insist: “Show me the money,” and find out how all this wealth is distributed.

Europe, which interests us most, has a relatively small amount of this enormous wealth. Overall HNWI wealth growth was 4.5 per cent last year, far less than in North America or Asia – although ahead of the UK. Nonetheless, the HNWI population grew 2.8 per cent.

Germany saw the most significant growth of 4.5 per cent in its HNWI population, while France’s grew 1.7 per cent and Russia’s 1.2 per cent. The UK, on the other hand, saw its HNWI population decline by 3 per cent as GDP contracted by 9.9 per cent in 2020, and Brexit drove an exodus of much wealth. Denmark, Luxembourg, Finland and Sweden also saw gains.

This compares with HNWI population growth in North America of 10.7 per cent and, for Asia Pacific, 5.8 per cent.

Why is Europe lagging? Not enough tech stocks on the exchanges in the ‘Old World,’ according to the report. European exchanges have much capital focused in fashion and heavy industry – which suffered during the pandemic, while companies like Amazon…

This is why for North American HNWI’s, equities made up 38 per cent of total investments, while Europe’s richest only invested 24 per cent in stocks, and Asians only 22 per cent.

Asia’s wealthy nonetheless made impressive gains: China’s HNWI wealth grew 13.5 per cent, Taiwan nine per cent, Hong Kong 12.1 per cent, South Korea 9.2 per cent. These economies recovered from the pandemic faster than those in the West, and this was what largely drove HNWI wealth increases.

Importance of low interest rates

Low interest rates have been a key factor in this wealth creation, as the report from Crédit Suisse points out.

“The lowering of interest rates by central banks has probably had the greatest impact. It is a major reason why share prices and house prices have flourished, and these translate directly into our valuations of household wealth.

“Lower interest rates also seem to be a cost-free option, except perhaps to those relying on interest payments to supplement their income. Lower interest rates have no direct impact on public expenditure and coordinated action by central banks can even reduce expenditure via reduced public debt interest.”

Then, surprisingly, much of the wealth appreciation comes from currency appreciation.

The Crédit Suisse report points out that the change in wealth per adult is also a good way to better understand the comparative performances of different countries. The countries in which wealth has most increased per adult are Switzerland (up $70,729) and Australia ($65,695) top the list. Belgium and Sweden also gained more than $50,000, and Germany, the Netherlands and the United States more than $40,000 each.

“Asset price rises played a role in some of these countries, most notably the United States. But currency appreciation is the main explanation for most of these increases in average wealth.

“Unexpectedly, given the circumstances, few countries suffered a loss of wealth in 2020, and the losses that did occur were quite modest. Currency depreciation caused wealth per adult to fall in Brazil, Chile and Russia, but by less than $10,000. Our estimates suggest that the United Arab Emirates (down $18,540) and Hong Kong SAR (down $26,419) suffered the greatest losses.”

Finally, the overall regional disparities seen above are reflected in the fact that North America and Europe together account for 57 per cent of total household wealth, but contain only 17 per cent of the world adult population. The wealth share in the Asia-Pacific region (excluding China and India) is similar to its share of adults, and the same is true for China. However, the adult population share is three times the wealth share in Latin America, five times the wealth share in India, and over ten times the wealth share in Africa.

Businesses that do not take these phenomena into account proceed at their peril. Income inequality has become literally awesome.