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WEALTH-X QUARTERLY BRIEFING Q1 2016: FINANCE

Quarterly Briefing Q1 2016 Finance

World stock market losses and the impact on the ultra wealthy

Unusual volatility swept the global equity markets in the first quarter of 2016, triggered by fears of the economic slowdown in China, then collapsing oil prices. The year started with Wall Street’s biggest first-week fall in more than a century, and the 8% monthly decline in the MSCI world index marked January’s performance as worse than 96% of the months on record.

“For many ultra wealthy individuals, most of their wealth is privately held, so it’s not exposed to the volatility in pricing that the equity markets are,” Wealth-X President David Friedman said.

However, there is a psychological impact, according to Wealth-X CEO Mykolas Rambus. “What I’ve observed over the years in engaging with UHNWIs in the community at large, is that for the second generation, the 2% loss feels like a 10% loss,” he said. “It’s a heightened psychological impact for the second generation, which sees loss of wealth as tremendously concerning; the first generation thinks they can earn it back. That dynamic can be understood to deepen relationships at financial institutions.”

Trust is key

The turmoil in the markets has highlighted ultra wealthy clients’ lack of trust in their advisors. “It reinforces an existing view that ultra wealthy individuals have had since 2008, with the substantial fallout from the global financial crisis,” Rambus said. “There was a breaking of trust; these individuals lost trust in their advisors, in the system. A lot of investors learned their lesson in China; it reinforces how volatile things are and how proactive individuals need to be.”

The push to gain UHNW clients’ trust is the most prominent wealth management trend of the decade, according to the Attitudes Survey conducted by Wealth-X in conjunction with Knight Frank. Of the respondents, 92% agreed that wealth managers have had to work harder to earn the trust of their UHNW clients. The survey was based on the views of about 400 of global private bankers and wealth advisors who, between them, manage assets for about 45,000 ultra high net worth individuals (UHNWIs) with a combined wealth of over US$500 billion.

Investment opportunities and the rise of the single-family office

In the uncertain economic climate, many ultra wealthy individuals will be seeking investment deals, Rambus said: “In 2008-2010, a lot of the individuals at the highest end of the wealth spectrum, billionaires first, were able to stake early opportunities, and that was the group that experienced the biggest growth. What we will see is greater awareness, because we’re so close to economic shock. These billionaires will be heavy in cash and look for opportunities for arbitrage. All that being said, there aren’t many opportunities.”

The volatility and the gyrations in the equity markets will only compound the trend in single-family offices of investing directly in companies, in real estate deals, and to bypass the whole Wall Street infrastructure on the capital markets side, Friedman said: “Coming from the wealthiest investors, we will see continued velocity of investment on the private market side for privately held assets, and single-family offices have started to compete with larger institutions around these types of investments.”

Likewise, Friedman said, “you’re also going to see this trend of big private banks continuing to try to offer the look and feel of a family-office type structure, to compete with the rise of multi-family offices that are providing more customised solutions that are unbiased. Where the big banks are going to continue to win is where they can offer actual banking services, such as loans, when an ultra affluent investor can leverage what they have, from commercial banking or commercial loans or private loans, against the balance sheet of the bank.”

Where is the money?

Wall Street firms have been paring down staff amid one of the worst quarters for investment-banking and trading revenues. “Investment banking jobs are being cut, and clearly businesses are trying to draw their map from a staffing and infrastructure perspective,” Rambus said.

Rambus said the outlook on China is positive in the long run: “There may be temporary hiccups, but China is still getting into areas such as service and leisure, and making that shift from manufacturing to a consumer-driven economy.”

The privatisation of Russian state enterprises is underway, and it will take some time to evolve. “That will create new oligarchs and a new ecosystem around those individuals,” Rambus said. “Russians are still spending money at the very high end; that hasn’t slowed in a substantial way.”

India is doing very well on a paper basis, especially for tech valuations, Rambus added: “India is a place where we’re seeing a strong story, replacing short term excitement around China.”

Brexit fears

“If a Brexit were to occur, the UK, with its educational institutions, political institutions and influence around the world, will continue to be an extremely important destination for the ultra wealthy,” Rambus said. “Yes, you will lose individuals in the case of a Brexit, but I don’t think it will fundamentally change the map of where the money is. If anything, the fallout from terrorist attacks would have more impact on wealth as opposed to a Brexit.”

Depressed oil prices are here to stay

The drop in oil prices “looks to be a fundamental disruption” in the industry, according to Rambus. “I don’t see these depressed natural resource prices as a temporary correction; I would suggest that this is by design and policy of the current US administration, in terms of a long game for power that seems to be working in favor of the US.”

As a result of oil prices falling, wealth creation in the Middle East “remains highly tentative,” Rambus said. “It remains to be seen if the government in Saudi Arabia can create a work culture and business environment that is conducive to the entrepreneurship required to create new wealth. It’s going to be a very challenged time in the Middle East, given what continues to happen geopolitically.”

Spotlight on the US presidential election

The US looks to be the biggest market on the private wealth side. “It remains to be seen how much volatility there really is as related to the presidential election,” Rambus said. Of the five current presidential candidates, “two of these individuals are advocating for ripping up the system and starting anew,” he said, referring to Bernie Sanders and Donald Trump.

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