New York: The rich are still getting richer - but the coronavirus crisis may slow the breakneck pace of wealth accumulation for years to come.
Volatile markets and the economic fallout from the virus could wipe out as much as $16 trillion of global wealth this year and hinder growth for the next five years, according to Boston Consulting Group. By comparison, the 2008 financial crisis erased $10 trillion.
A decade-long bull run in equities has helped the millionaires and billionaires of the world increase their wealth at double the rate of middle-income and poor people. Now that same dependence on markets can put their fortunes at risk if volatility caused by the virus continues for years.
$10trillionThe wealth that got extinguished in 2008
Markets won't help this time
Personal financial wealth reached $226 trillion globally last year, a 9.6 per cent gain from 2018 and the strongest annual growth rate since 2005, the BCG study found. From 2019-24, wealth growth worldwide could slow to a compound annual growth rate of 1.4 per cent if BCG's worst case scenario pans out. Its model for a quick rebound predicts a rate of about 4.5 per cent.
"The segment that will be hit the hardest in the slow recovery and lasting damage scenarios will be the wealthiest, simply because of the high exposure to equity markets and market volatility," said Anna Zakrewski, global leader of BCG's wealth management practice.
The number of dollar millionaires globally has tripled over the past 20 years to 24 million - with more than two-thirds in North America - and they collectively now hold more than half of all financial wealth, the report said. That means a worst case scenario would hit that continent hardest, along with Japan.
Both regions would experience declines over the five-year period.
Cross-border flows will slow to a trickle
BCG estimates that $9.6 trillion of the world's wealth was held offshore in 2019, up 6.4 per cent from the previous year, with Asia (excluding Japan) being the largest contributor. However, in more stressed situations, such as the stagnant growth of the early 2000s or the financial crisis, cross-border wealth growth tends to suffer, according to BCG.
In the short term, the wealthy will move assets to perceived safe havens. Over a longer period some of it may be repatriated to make it easier to access liquidity, especially if the downturn lasts. That would work to the advantage of places like Hong Kong and Singapore because of their proximity to China and other fast-growing markets of Asia.
While Switzerland remains the destination of choice for those wanting to place money abroad, Hong Kong and Singapore are catching up. Both are expected to grow the assets they manage more than twice as fast as Switzerland over the next five years.
Business of wealth
The pandemic could also push overdue change for the guardians of the world's riches. Wealth managers are confronting the virus in worse shape than they were before the financial crisis, with lower returns on assets and higher cost bases than in 2007, according to BCG.
"We see COVID-19 as a wake-up call for the industry," said Zakrewski. "The last 10 years have fueled quite a confident performance for some of the wealth managers and taken away the pressure to address business models."
Wealth managers have only "scratched the surface" on costs, according to Zakrewski. While regulatory and compliance requirements have bloated costs, most banks have just thrown people at the problem instead of redefining operating models and exploring digital options for reducing costs, she said.
Despite a significantly larger asset and client base, the industry's profit pool remains the same as it was more than a decade ago. For 2019, the profit pool reached $135 billion, compared to $130 billion in 2007 when the total global wealth was half of what it is today.