Although the steady decline in oil prices has resulted in a decline in wealth across the Middle East, different wealth segments in the region are growing at different paces. While the UHNW segment is seeing a drop in its overall wealth, the Middle East is still creating new billionaires at a faster rate than most of the world; second behind only Asia-Pacific. Recent trends such as regional economies implementing economic diversification strategies and opening up capital markets for foreign investment inflows also promises more wealth creation opportunities.

Despite the lower oil price environment and geopolitical instability in the region, Saudi Arabia and the UAE are outperforming the growth of the entire EMEA region and new wealth in the Middle East is still being created at a positive rate. It should be noted that the various wealth segments are affected differently depending on asset allocation strategies and the type of businesses. The growth of wealth is split between the creation of new wealth, driven by the GDP and savings, and the performance of existing assets, driven mainly by more innovative investment strategies.

In contrast to two years ago, the share of wealth coming from asset performance has increased and the type of advice clients receive from their wealth managers has become more important now than ever. A significant amount of financial information is now available to everyone thanks to data analytics technology. Although this does not discount the service of well-educated financial advisers, this technological advancement has led to more complex products and investment strategies.

From asset allocation to risk management, clients are becoming more demanding in terms of asset performance. Conservative performance, which beats inflation trends, is no longer significant, as HNWIs and UHNWIs desire the cash flow needed to pay for luxury real estate holdings, yachts and other investments.

Cultural practices

Like the rest of the world, there is no typical profile of a HNWI/UHNWI in the Middle East. However, certain cultural practices, local business values and generational aspects need to be factored in when determining wealth creation strategies in the region. While the old generation of HNWIs/UHNWIs take a more traditional industry approach to business and wealth creation, like trading, the new generation ventures into newer sectors; such as technology. Similarly, the risk appetite differs from generation to generation.

There is a growing group of new entrepreneurs who are significantly contributing towards greater wealth creation in the region. Whilst creating new wealth, these new entrepreneurs are creating new jobs which are helping diversify regional economies. With specialised knowledge, they are also disrupting certain sectors and their old ways of wealth creation. Over the next few years, it can be expected that more new generation entrepreneurs will contribute towards regional wealth creation.

Middle East wealth creation is set to grow steadily despite lower oil prices, but at a rate far from what we have seen in the last decade. Fortunately, the oil sector is not the primary source of wealth for most UHNWIs. The typical UHNWI in the region is not an oil baron, and mostly represent trading businesses or industrial conglomerates.

Diversification

There are interesting trends emerging in the Middle East’s wealth creation landscape. Amongst the GCC countries, the UAE can be seen as the market where the diversification of the economy is paying dividends. Despite a decline in wealth creation within the UHNW segment, the country has outperformed the whole EMEA region thanks to its open economy and the diversified interests of its UHNWIs. The country also has one of the youngest UHNW populations in the world as well as one of the most entrepreneurial; since many lead successful real estate and industrial conglomerates.

Diversification can be seen as a key aspect in the creation, preservation and growth of wealth. Many Middle East HNWIs/UHNWIs are successfully managing diverse industries and are as sophisticated as their counterparts in the rest of the world. One important reason behind this is that preserving and growing their wealth on a sustainable basis is as important as wealth creation.

Wealth managers play a crucial role in contributing effectively towards greater wealth creation in the region, coming up with innovative ideas and creative investment strategies customised for each individual of this segment. While the financial markets rebound since the end of the global financial crises in 2009 has allowed the performance of portfolios invested in directional bets to improve, time is now ripe for alternative strategies which tend to be less correlated to stock or bond markets.

— François R. Farjallah, Global Head of the Middle East, Indosuez Wealth Management