WM Market Reports

Wealth Growth Defies Crises; Hong Kong To Take Switzerland's Offshore Crown – BCG

Tom Burroughes, Group Editor, 10 June 2022

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One of the standouts of the report was BCG's reckoning that Hong Kong is going to overtake Switzerland as the world's largest hub for cross-border flows. It suggests that the problems of zero-Covid policy and political changes aren't seen as holding the Asian jurisdiction back for long.

Wealth creation continues worldwide in the face of crises such as the havoc caused by the pandemic and tensions between the US and China, according to Boston Consulting Group in its annual overview of the industry. 

Total financial wealth stood at almost $530 trillion in 2021, rising by 10.6 per cent from 2020, the report, one of the major overviews of the wealth sector to come out every year, said.

Among other highlights of the study (see more below), it predicted that Hong Kong will displace Switzerland’s position as the world’s largest hub for cross-border financial flows. 

“Strong equity markets in 2020-21 helped propel the gains," the report noted, although they have since been hit by the reality of higher interest rates, and the Russian invasion of Ukraine in late February. And the report warned that decades of high inflation, as well Russia’s invasion of Ukraine, could derail growth. But even in the event of a prolonged conflict in Ukraine dragging into 2023, the report said: “In the prolonged impact scenario, wealth expands at a slower five-year compound annual growth rate of just 5.0 per cent and generates $5 trillion less in global wealth (a figure roughly comparable to the total financial wealth in Eastern Europe today.) But in both scenarios, the overall trajectory remains positive.”

Last year, the S&P 500 index soared by 26.9 per cent. And the BCG report said that physical goods in the form of real estate, wine, art, watches, and related holdings remain the “destination of choice” for much of the world’s wealthy, and investor interest in them continues to intensify.

Over the past year, demand for real assets surged by 9.4 per cent ($22 trillion), bringing the total to $255 trillion. Taken together, these assets now account for almost half of the total wealth pool.

Regions
The report said that was the case before COVID-19, Asia-Pacific – which consists of Asia (excluding Japan) and Oceania – will see the fastest rates of wealth growth, with asset values expected to rise by a CAGR of 8.4 per cent through 2026. If that rate holds, Asia-Pacific could become home to nearly 25 per cent of the world’s wealth by 2026.

“The Middle East and Africa could see the biggest leap in wealth growth. Buoyed by the region’s massive energy holdings, wealth is on track to rise by a CAGR of 5.4 per cent over the next five years. Wealth growth in North America will be slower than in years past. Our estimates suggest a CAGR of 4.7 per cent through 2026, down from the prior five-year average of 9.1 per cent. Western Europe is also likely to see wealth growth slow, from roughly 4.5 per cent over the past five years to less than 4 per cent annually until 2026 in our base-case scenario,” it said.

Crossing the border
Globally, BCG said it expects cross-border activity to rise by roughly 5.0 per cent to 5.6 per cent through 2026. 

“But crisis effects could reshuffle the leader board, with Hong Kong replacing Switzerland as the world’s largest booking centre next year, and Singapore coming close to ousting Switzerland from second place,” it said. “Aided by healthy inflows from Hong Kong, Singapore could see annual growth of 9 per cent to 10 per cent from now through 2026. And Russia could edge out Saudi Arabia and Turkey as the largest source country to book in UAE, with total assets on track to more than triple over the next five years, albeit from a very small starting base.

“By contrast, booking centres in Western Europe may experience outflows. Switzerland alone could see upward of $6 billion annually exit the country through 2026, and asset growth will struggle to exceed 2.4 per cent during this period. Still, Switzerland’s booking centre base is huge, and 2.4 per cent growth will generate roughly $320 billion in additional assets by 2026,” it said.

ESG powering growth
Perhaps inevitably, the report weighed in on environmental, social and governance (ESG)-driven investing. 

“Net zero is often cast as an ambition directed towards 2050. But for wealth managers globally, it’s an immediate imperative. Sustainable investing – of which net zero is a key component – is growing three to five times as fast as traditional investing. By 2026, we project, this asset class will account for 8 per cent to 17 per cent of privately invested wealth, up from 4 per cent to 11 per cent today,” it said. 

(The report also expressed views on other topics, such as digital assets and how to implement net-zero ideas for clients. This news service will carry further insights in due course.)

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