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Geographical diversification driving wealth to Asian region

It may seem logical that war in Ukraine, inflation, rising interest rates and market turmoil would make the wealth-building prospects a little uncertain.

That is not the case, say the experts at management consultants BCG in the company’s annual report on global wealth. Instead of staring into an abyss, they look up and see the world’s financial wealth steadily growing over the next five years.

In their base case, global financial assets are predicted to grow at an annual rate of 5.3 percent through 2026. That assumes Russia will halt its invasion of Ukraine this year and geopolitical tensions will ease, even if sanctions against Moscow would remain in place until 2025.

Remarkably, a longer conflict in Ukraine has only a modest impact. Even if the fighting continues well into 2023 and sanctions increase, the effects on wealth accumulation will likely be limited as long as there is no military escalation. Under these circumstances, BCG forecasts a 5.0 percent growth in financial wealth. So almost the same.

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To be fair, the forecast implies a significant slowdown in wealth accumulation compared to the recent past. Financial asset growth in the decade to 2021 was 7.2 percent per year. Still, given the role of rising financial markets in asset boosting, it can be expected that at a time when conditions are likely to be more choppy, wealth accumulation will walk in the sand.

BCG points to the remarkable resilience of wealth building during the global financial crisis of 2008 and the pandemic shock of 2020. “While not immune to market volatility, global wealth portfolios have recovered from recent shocks,” the authors write.

In addition, inflation can increase the wealth of savvy investors by boosting the shares of inflation-proof companies – and by encouraging them to convert money from rapidly depreciating cash into securities.

Private finance of digital asset management companies hit new highs in 2021. Chart showing private finance invested in asset management fintechs ($ billion).  Funding increased from $3.2 billion in 2020 to $14.5 billion in 2021

At the heart of the BCG forecast, however, is the increasing geographic diversification of the world’s wealth away from the Atlantic to the Asia-Pacific region. Even with its economy in the doldrums, China continues to collect money, just like its neighbors. These are countries far from the Donbas.

The Asia-Pacific region is not immune to the impact of higher energy and food prices, but the effects are dampened by distance and by its own economic dynamism. The same is true, albeit to a lesser extent, for Africa and Latin America. Oil producers everywhere are seeing a bonanza, not least in the Gulf States.

One consequence for the wealthy — and their advisers — has been the seemingly relentless rise of Hong Kong and Singapore as global wealth management centers. BCG predicts that Hong Kong will overtake Switzerland as the world’s largest center for cross-border assets by 2026, a shift of historic proportions.

And, the writers say, it will come despite a moderate exodus of money from Hong Kong to Singapore (and elsewhere) due to the political tightness in Beijing – though there will still be a larger influx from the mainland to Hong Kong.

Switzerland has the most overseas wealth.  Chart showing 2021 financial centers cross-border assets ($tn) and cross-border assets dependency (%).  Switzerland had $2.5 trillion in cross-border assets in financial centers by 2021

Does this spell the demise of traditional wealth management centers? Not necessary. BCG argues that high-tech wizards in Zurich, London and New York have every opportunity to take advantage of the digital revolution — and turn the sometimes clunky technical services offered in wealth management into something truly compelling. That’s all very promising, especially if you’re a tech-oriented wealth management company with a decent client list.

But history suggests that BCG’s views should be read with caution. Wars have a habit of spiraling out of control; inflation is not always as transient as the authorities say; and a market upheaval can cause lasting economic damage, such as the global financial crisis. It might be bad timing for rose-colored glasses in the wealth industry.

Stefan Wagstyl is the editor of FT Wealth and FT Money. Follow him on Twitter @stefanwagstyl

This article is part of FT Wealthan in-depth section on philanthropy, entrepreneurs, family offices, as well as alternative and impact investing

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