Although investable assets of the Middle East’s most wealthy in 2010 are back to their 2007 level of $1.7 trillion, according to the Capgemini and Merrill Lynch’s World Wealth Report (WWR), return expectations and attitudes have changed considerably. In particular, Ultra High Net Worth individuals (UHNWIs), a category comprising households with over $50 million in investable assets, have shifted their focus to capital preservation through less risky, simple investments.
“UHNW investors are starting to understand that probably in the near-and-medium-term, returns will be smaller than in the past… and also what they want to achieve is to protect the assets which they have and then tactically invest in distressed opportunities,” said Heiner Weber, who heads the Middle East desk at Falcon Private Bank.
Largest global private banks in 2010
In fact, rising fears of another global recession in 2011 come at a time when the Middle East’s High Net Worth Individuals (HNWIs) — defined as having more than $1 million in investable assets — and UHNWIs are better positioned and prepared for a crisis than they were in 2007.
A 2011 survey of private bankers by Booz & Company showed the low-risk fixed income asset class topping the list of preferred investments by the region’s investors. Fifty percent of those surveyed selected fixed income as their clients’ most favored category after the 2008 crisis, while cash and time deposits ranked second, with 40 percent of responses. On the other hand, only 15 percent of private bankers said the risky funds business was favored by their clients, behind equities, with 35 percent of responses.
Middle East HNWI wealth ($trillions)
Percentage of HNWI population under 55 in 2010
Source: Capgemini and Merrill Lynch 2011 World Wealth Report.
In addition to more defensive portfolios and lower return expectations, investors have become more familiar with the products they hold and even more thorough in selecting their private bankers. According to Stephen Evans, the Middle East’s regional head at Standard Chartered Private Bank, “The way the wealthy think about their advisors now has changed. They are very much more particular, choosy, discerning, they ask more questions now about the quality of their bankers, their qualifications, and they are asking the right questions.”
Although private bankers and clients in the region have built valuable relationship experience since 2008, the wealthy in the region are still more difficult to cater to than in developed markets, given product preferences, demographic structure and geographic breadth.
Firstly, a third of GCC clients prefer Islamic products over conventional products, presenting the need for additional skills and product development. The Islamic preferences of the region’s clients have so far handed local private banks a key advantage over global banks operating in the Middle East, although the latter are still perceived to have “more stability, brand equity and institutional trust,” according to Daniel Diemers, principal with Booz & Company in Dubai.
The geographic fragmentation of GCC wealth also implies an added layer of cost to private banks. According to Booz & Company, Saudi Arabia has the largest pot of wealth in the region, with an estimated $530 billion in investable assets as of 2010, but others, such as the UAE and Kuwait, also hold considerable wealth, estimated at $270 billion and $145 billion, respectively, in investable assets.
As a result, private banks find themselves setting up multiple fully-staffed offices across various Middle Eastern cities. In particular, Switzerland-based banks, whose home country is viewed as a key source of geographic liquidity diversification, have offices in virtually every major city in the region. Credit Suisse and UBS offer private banking services in at least seven regional cities, with the latter employing more than 150 people in its Middle East operations.
Furthermore, the region’s wealthiest are far from the gray-haired clients typical of developed markets; The WWR showed that 56 percent of HNWIs in the Middle East are under 55 years of age, the second highest rate after Asia-Pacific, excluding Japan, with 69 percent and ahead of Europe’s 45 percent.
Despite the emerging global economic and financial challenges, the region’s wealthy and their advisers are better equipped than ever. However, upgrading Information Technology tools for investors and broadening the scope of services offered by private banks, especially in the corporate finance area to cater to the widespread family business model in the Middle East, will be critical to the industry’s resilience.