Region’s richest profit from oil boom

The number of high net worth individuals (HNWIs) – people with net financial assets of at least US$1 million, excluding their primary residence and consumables – has risen sharply in the region, and will continue to do so, according to a new study.

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By  Tamara Walid Published  June 25, 2006

The number of high net worth individuals (HNWIs) – people with net financial assets of at least US$1 million, excluding their primary residence and consumables – has risen sharply in the region, and will continue to do so, according to a new study. The 2006 World Wealth Report, compiled by Merrill Lynch (ML) and Capgemini, revealed that at the end of 2005, there were 8.7 million HNWIs worldwide. There were 300,000 HNWIs in GCC countries alone, and in the Middle East, the rise in the total HNWI population in 2005 was 9.8%. HNWI's total wealth in the region also increased by almost a fifth. “The Middle East, which accounts for nearly 65% of the day’s oil reserves, continued to benefit from the large industrialised nations’ ongoing dependence on fossil fuel; rising prices continued to drive oil export revenues skyward,” read the report. “This trend bolstered investor confidence and contributed to large trade-driven surpluses in this region.” HNWIs in the Middle East showed a strong appetite for risk in 2005. As a result, their asset allocation was highly skewed into equities and real estate. However, at the same time, increased bond issuances suggested an increased interest in this form of fixed income investment. “In 2006-2007 you’re seeing a big shift where people from emerging markets are keeping their wealth in their countries whereas investors in developed countries, who usually invest in their countries are seeking to invest elsewhere,” said Mones Bazzy, executive director of ML’s Global Private Client Group. “There’s an unprecedented amount of wealth in the region and globalisation has intensified,” he continued. “Private equity is very high in the region and this part of the world has become very appealing to investors.” Worldwide, the report predicted that global HNWI financial wealth would reach US$44.6 trillion by 2010, growing at an annual rate of 6%. In the Middle East, the annual growth rate of HNWI wealth was expected to reach 8% a year between 2005 and 2010. “Exceptionally high market capitalisation, complemented by well-above-average real GDP growth in markets such as Saudi Arabia and the UAE, helped drive HNWI growth in the region by 9.8% in 2005,” the report continued. “Not surprisingly, the region’s wealth, growing at 19% in 2005, continues to experience an inequitable distribution.” Saudi Arabia is home to the region’s highest number of HNWIs. The number of HNWIs in the kingdom grew 13.5% from 70,600 in 2004 to 80,100 in 2005. Market capitalisations in many emerging markets outpaced most major economies around the world as HNWIs’ investments are gradually shifting away from developed markets, explained the report. Saudi Arabia, for example, delivered outstanding market capitalisation growth figures, with an increase of 115.5% in 2005. The number of HNWIs in the UAE grew from 52,800 in 2004 to 59,000 in 2005, a rise of 11.8%. Robust economic growth continued at 6.7% (though down from 7.4% in 2004), whilst the oil industry, accounting for a third of economic production, exerted a positive economic influence nationwide. Population expansion contributed to strong output growth, while the residential and commercial real estate markets are in high demand and experiencing shortages, the report said. The report also noted “efforts to establish strong regional financial markets in Dubai are succeeding, due in large part to the oil industry.” In order to determine sources of HNWI wealth, ML asked relationship managers around the globe to estimate the sources of wealth creation among their HNWI clients. They then validated the findings with a select group of clients. In the Middle East, 32% of HNWI wealth came from inheritance; the highest of any region. Some 25% came from income, 24% from business ownership and sales of businesses, 11% from restricted stock and stock options, 5% from investment performance and 3% other sources. ML is one of the world’s leading wealth management, capital markets and advisory companies, with offices in 36 countries and territories and total client assets of approximately US$1.8 trillion. As an investment bank, it is a leading global trader and underwriter of securities and derivatives across a broad range of asset classes and serves as a strategic advisor to corporations, governments, institutions and individuals worldwide.

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