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Sun 1 Jul 2007 12:00 AM

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Money money money

What affect the growing number of millionaires in the region is having on the wider economy.

It took fifteen minutes to get through customs, and the officer in charge was unusually apologetic. "There are a lot more rich people today then there were a year ago," he explained.

Outside the private aviation terminal at King Khaled International Airport, on the outskirts of Riyadh, things were looking busier than ever. Besides the private jumbo jet belonging to HRH Prince Alwaleed were parked another 30 smaller jets. A year ago, you rolled up in a limo, were whisked through security and ten minutes later in the air.

The UAE saw its high net wealth population grow by 15.4%... benefiting from the high price of fossil fuels.

Not any more.

The scene is being repeated across the Middle East for one very simple reason: a lot more people have become a lot richer. According to the Merrill Lynch World Wealth Report published last week, Saudi Arabia now has 89,6000 millionaires - a rise of 11.8% on the previous year. In the UAE, 68,100 individuals are now members of the millionaires club, a jump of 15.4% on 2006. Across the whole Middle East, the increase is 11.9%.

Even though the total wealth growth is slowing because of last year's stock market plunges in the region, the Middle East - and the rest of the world - is becoming richer by the day.

The ranks of wealthy private investors are growing. Not only that, they better understand world markets and are more active in managing their portfolios, according to the latest World Wealth Report from Merrill Lynch and Capgemini.

The sector is growing faster than in recent years. The number of European individuals joining the ranks of wealthy investors rose substantially in 2006, but not as fast as those investors from emerging market countries, who are becoming more prominent. At the same time, the report details ever clearer patterns of how the wealthy are becoming more ambitious with their investment choices and more sophisticated in reading the markets.

This means that for firms serving private clients, simply keeping up with the changes in tastes is no longer good enough. We also have to anticipate the individual needs of this ever more important group.

2006 marked a return to growth in private wealth. Worldwide, the number of people with more than US$1m in net investable assets grew by 8.3% to 9.5 million. Assets held by these high net worth individuals (HNWIs) grew by 11.4% year-on-year to US$37.4 trillion. These strong gains followed a slowdown in growth in 2005. Wealth continues to consolidate with the assets of the ultra high net worth individuals (those with net investable assets of more than US$30m) outpacing the wider HNWI population.

Fuelling this strong performance was the powerful combination of robust GDP growth and gains in world stock markets, as market capitalisations accelerated in most regions of the world.

Mature European economies including Germany, France and the United Kingdom saw significant uplifts in real GDP growth. Key emerging market economies, notably China and India, managed to improve on already fast-paced economic growth.

The Dow Jones World Stock Index grew by 16.4% in 2006 compared with 9.5% in 2005. HNWIs took advantage of booming stock markets in Europe, Asia Pacific and Latin America. For example in Asia, the Shanghai/Shenzhen market capitalisation grew by 220.6% - largely due to new companies floating.

Europe enjoyed its strongest year of wealth growth since 2000 with total high net wealth reaching the benchmark level of US$10 trillion, thanks in part to greater business confidence.

Numbers of HNWIs in the region grew by 7.8%, easily surpassing growth in the previous 12 months of 4.9%. Among the EU 27 nations the high net wealth population grew by 6.4% - comfortably ahead of gains in 2004-2005 of 4.6%.

GDP growth levels in the EU, while not spectacular, were a significant improvement on 2005. Italy, for example, moved from stagnation (0.1% growth in 2005) to growth of 1.7% in 2006. More tellingly, economic sentiment in November 2006 reached its highest level since January 2001. For example, Germany's IFO Business Climate Index in December 2006 hit its highest level since it was rebased in 2000. Business confidence was a key factor in France and the UK where the high net worth population grew at faster rates in spite of slower stock market growth than 2005. France had 6% more HNWIs by the end of 2006 and the UK 2.7%.

HNWIs in emerging markets are growing at a pace that reflects the speed of wider development in these dynamic economies. Asia's star performers were Singapore and India - whose high net worth populations each grew by in excess of 20%. India registered its 100,000th US dollar millionaire.

Russia's wealthy population grew by 15.5% to reach 119,000. The United Arab Emirates saw its high net wealth population grow by 15.4%. Both countries benefited from the high price of fossil fuels. Russia was also boosted by the rapid development of its stock market. Many large state-owned companies had their initial public offerings and shares of several Russian banks more than doubled in value.

Africa, meanwhile, befitted from high commodity prices which boosted foreign direct investment in mining and exploration. The continent's high net worth population increased 12.5% and wealth rose by a massive 14%. HNWIs demonstrated in 2006 just how nimble they have become, shifting portfolios to adapt to prevailing market. After the rush towards alternative assets, such as hedge funds, in the earlier years of this decade, wealthy investors took a sizable step back in 2006 responding to relatively poor performances by such assets as hedge funds. They liquidated large quantities of these investments and increased allocations to the real estate market, taking advantage of a surge towards record prices in the sector.

Allocations to alternative assets halved - from 20% of HNWIs' financial assets in 2005 to just 10% last year. Though superficially significant, Merrill Lynch believes that this was a tactical move by HNWIs, rather than a long term movement from assets such as hedge funds, commodities, foreign exchange and structured products. Merrill Lynch projects allocations to alternative investments to climb back to 13% in 2008.Just as they spotted the dip in alternative assets HNWIs around the world identified the opportunities for higher returns in real estate, shifting allocations to 24% of portfolios, up from 16% in 2005.

They did so as commercial real estate prices shattered records in 2006, largely due to a wave of consolidation among US real estate companies. Furthermore pension funds, foreign investors, real estate investment trusts (REITs) and private equity funds drove prices skywards as they competed for the same real estate properties.

Returns on REITs, funds that buy and manage income-earning property, outperformed equities for the seventh year in a row. The US Real Estate Index made gains of 34.4%, up from 8.3% in 2005. HNWIs are more resilient than others to dips in residential property prices. They typically hold half of their real estate assets in second homes without mortgages - leaving them far less exposed to higher borrowing rates. As well as showing adaptability, HNWIs are acquiring a greater taste for less familiar markets. North American investors in particular are becoming more global, driven by greater awareness of international developments, better portfolio performance and risk management. Wealthy North Americans increased allocations to Europe, Asia-Pacific and Latin America. They now invest 27% of assets outside domestic markets compared with 22% in 2005.

A third important trend among wealthy investors is their increasing consciousness of social and environmental concerns. More HNWIs want to invest in companies and financial products that share and reflect their concerns. Globally, socially responsible investments form 8% of the HNWI asset pool. Investors in Asia-Pacific lead the way with a 14% allocation to SRI. North American and Middle Eastern investors allocate 8% while Europeans allocate a below average 6%.
More than 160 investors, investment managers and corporations representing US$5 trillion in assets, had by the end of 2006, signed up to the "Principles for Responsible Investment" - a project co-ordinated by the United Nations that seeks to raise environmental, social and governmental issues among investors.

Increasingly, it is becoming easier to find opportunities to invest in and support green technologies. Large institutions, such as corporations and venture capital firms are backing development of new fuels such as ethanol and fuel cells. Globally, more than US$70bn was invested in green technologies in 2006, up 43% on the previous year.

What is crystal clear from the report is just how important it is to listen to investors. Financial firms serving this dynamic community have to pay acute attention to the ever more specialised needs of their clients. From the lower wealth bands to the richest, clients across the board agree that good service quality more than any other factor keep them loyal to a wealth management firm. Furthermore clients rely heavily on advice and recommendations from friends and family in choosing a wealth manager.

Listening to and taking the effort to learn more about their clients is putting wealth managers in a better position to the identify new and more adventurous investment opportunities that investors appear increasingly to want. Successful, dynamic approaches to wealth management include segmenting clients in a more sophisticated way than simply by assets under management. Interests, cultural background and financial behavioral attributes are important factors in aligning clients with the right products.

Secondly, firms must constantly assess whether their product range and approach is good enough to keep their clients happy over the long term. Their strategy must keep up with the market.

Thirdly, as technology evolves rapidly firms must take care to ensure they are delivering services through the channels that clients want. Some might want a single advisor, others prefer teawms. Some like online private banking while others prefer to speak to someone on the phone. These preferences do not tend to correlate with specific levels of wealth. By following these ideas, financial services firms can aspire to strengthen client relationships, increase investment activity and, ultimately, build a richer bond with their wealthy clients.

Living a life of luxuryWealthy aficionados are increasingly pursuing luxury collectible items such as high-end cars, yachts and private airplanes.

This segment of the luxury living market is favoured over art, sports investment and other collectibles such as wine and antiques.

Luxury collectibles accounted for more than a quarter of the money that the wealthy spent on their "investments of passion" in 2006. Art accounted for 20% of passion dollars and jewellery 18%.

Private jets now total about 10,000 in the US alone and are fast becoming a sizable component of the wealth of ultra high net worth individuals (UHNWIs).

Boeing has reportedly taken 11 orders for its wide-body private jets to be outfitted as "mobile mansions" at a price tag of US$150m each. Boeing says that the orders come from wealthy clients all around the world - and especially the Middle-East, US, Europe and Asia.

Interest in fine art is also on the increase, as more wealthy individuals are identifying art as an investment.

This is fuelling a rise in prices, creating new valuation records - not only for traditional masterpieces, but also for more contemporary work.

Higher prices in fine art are contributing to increased inflation for luxury items. Forbes' Cost of Living Extremely Well Index (CLEWI), which tracks the price of luxury goods, rose 7.0% in 2006 - well ahead of 4% inflation in consumer prices.

Super wealthy lead on philanthropyThe super wealthy are taking the lead in philanthropy, according to the 2006 World Wealth Report. One in six Ultra High Net Worth Individuals (UHNWIs), each with at least US$30m in financial assets, included philanthropy in their portfolios in 2006.

On average 10% of their wealth - more than US$285bn globally - went to charities and investments in good causes.

More than one in ten high net worth individuals (HNWIs) globally gave money away - and their donations averaged 7% of their wealth. Investors in Asia-Pacific were the most generous in 2006 with 14% them requesting a philanthropic offering in their portfolio and contributing, on average, 12% of their wealth.

High profile donations in 2006 included an initiative by Warren Buffet, CEO of Berkshire Hathaway, to donate US$37bn to five foundations. Richard Branson, chairman of Virgin, committed to invest all profits from his airline and rail businesses (estimated at US$3bn over 10 years) on combating global warming.

Report compiled by Imad El Aawar, Resident Executive Director Middle East, Global Private Client Group and Jonty Crosse, Resident Director Middle East, Global Private Client Group, at Merrill Lynch.

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