DECADES OF WEALTH PART II: THE NEXT 10 YEARS IN WEALTH & LUXURY

DECADES OF WEALTH

MYKOLAS D. RAMBUS CHIEF EXECUTIVE OFFICER

DAVID S. FRIEDMAN PRESIDENT

RIDZWAN AMINUDDIN SENIOR VICE PRESIDENT OF PRODUCTS

LYNN M. RAYNAULT VICE PRESIDENT GLOBAL MARKETING

LEAD AUTHORS

MARC COHEN REGIONAL MANAGING DIRECTOR FOR EUROPE

JAMES LAWSON CO-FOUNDER, LEDBURY RESEARCH

CONTENT CONTRIBUTION & EDITING

DAVID LINCOLN WEALTH-X INSTITUTE DIRECTOR

BENJAMIN KINNARD WEALTH-X INSTITUTE RESEARCH FELLOW

JAMES RIENSTRA WEALTH-X INSTITUTE RESEARCH FELLOW

IAN DONENWIRTH HEAD OF RESEARCH AND STANDARDS FOR EUROPE

IOANNA KOSMIDOU TEAM LEADER/EDITOR

WILL CITRIN MANAGING EDITOR

© WEALTH-X 2015

THIS PUBLICATION IS FOR YOUR INFORMATION ONLY AND IS NOT INTENDED AS AN OFFER,

OR A SOLICITATION OF AN OFFER, TO BUY OR SELL ANY PRODUCT OR OTHER SPECIFIC SERVICE.

ALL INFORMATION AND OPINIONS INDICATED ARE SUBJECT TO CHANGE WITHOUT NOTICE.

DECADES OF WEALTH 1

THE GEOGRAPHY OF WEALTHA BRIC RESHUFFLE

Jim O’Neill first coined the term “BRIC” just over ten years ago. Since then, Russia and China have taken much of the limelight – with both economies growing over 600%. Brazil continues to struggle to live up to expectations of its potential, and India has always been slightly enigmatic.

However, we may be now entering “India’s Decade”.

Over the past year, the rise in Indian wealth and the number of wealthy has been impressive – the number of millionaires climbed from 196,000 to 250,000, an increase of 27%. Aligned to this wealth growth is an equally substantial increase in luxury consumption: 2014 champagne imports were up 6% from 2011 (CIVC), for example, despite total exports being flat. Behind this rise is renewed economic optimism and performance, further propelled by the election of a new, reformist government.

WHERE WEALTH IS GENERATED, SPENT AND SAVED WILL SHIFT

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PART II: THE NEXT 10 YEARS IN WEALTH & LUXURY

DECADES OF WEALTH 2

Looking forward, India will continue to generate new millionaires at a rapid pace – we forecast 437,000 millionaires by 2018, and potentially double that number by 2023. The nation also has a young, well-educated population with high levels of entrepreneurship and business ownership, underpinned by a well-developed legal system. As such, wealth creation opportunities will be great, with a comparatively benign macro environment. Wealth creation and luxury consumption will not be quite as controversial in India, nor hampered by social inequality or austerity agendas as has been the case in Brazil and China. Structurally, with its long-standing caste system, wide gaps in incomes and wealth are more accepted in India.

AFRICA GROWS AND BECOMES A TECH MELTING POT

Wealth growth in Africa – particularly in the key markets of South Africa, Nigeria and Kenya – will continue, at an impressive trajectory of over 10% per annum. The continent has a youthful and naturally entrepreneurial population. Though it is rich in natural resources, Africa has become the focus of technological innovation. This could see the continent develop in a different and more accelerated way than other emerging economies have over the past decade.

For example, by using air-borne drones, tech firms are looking to bypass the expensive step of having to lay communications cabling over vast expanses of land to enable Internet connectivity to the population. And technology also avoids the need for large physical networks. Africa is already leading the way in mobile banking - the amount of money sent using cell phones is larger in Africa than in Europe and North America combined (Gartner). Africa has also become a major focus of attention for various Asian markets, especially China. By 2040, the continent’s ultra high net worth (UHNW) population is expected to quadruple and encompass more than 10,500 individuals.

THERE’LL BE OTHER BRIGHT SPOTS TO WATCH OUT FOR

In the Middle East, Iran may be the one to watch. A state rich in natural gas and other precious resources, it could undergo rapid economic resurgence once political and economic reforms have taken place. Such reforms could inspire a latent cosmopolitan and educated Iranian middle-class who have the potential to broaden the country’s horizons. Straddling East and West, Turkey’s increasing economic growth, in combination with its geostrategic position and emerging middle class, could strengthen its regional role in the Middle East and propel Turkey into the ranks of the 20 wealthiest nations.

Finally, Mexico will continue its path of strong growth. Compared to the high import duties of Brazil, the Mexican market enjoys a competitive economy, where doing business is easy and the tax burden is low, and the population is both familiar and interested in fashion and luxury, fuelled by exposure through the US.

PART II: THE NEXT 10 YEARS IN WEALTH & LUXURY

DECADES OF WEALTH 3

THE CREATION OF WEALTHINHERITED WEALTH WILL MAKE A COMEBACK, BUT NOT AS WE KNEW IT

In the past decade, the number of wealthy with “old money” or inherited wealth has steadily decreased in developed, mostly western, nations. The roots of this transition date back to the middle of the last century, but recently the trend has been accelerated by greater life expectancy and lower interest rates. This has meant the wealthy require more of their wealth to see them through retirement – with less to then pass on.

In countries that have emerged and thrived over the past decade, principally in Asia, a different phenomenon is occurring. Here, most of the wealth is new. We will soon see it being passed on to the next generation for the first time – “old new money”.

However, there are several important differences between these kinds of wealth transfers and inheritance as we know it in the West. The role of women in society, the importance of religion, cultural and traditional family values including primogeniture, will all have an impact on each wealthy individual’s approach to inheritance. We also expect sizeable wealth transfer to take place prior to the death of the wealthy individual, with a greater emphasis placed on ensuring the comfort and affluence of children and surrounding family more immediately. In total, $4.1 trillion will be transferred globally by UNHW individuals over the next decade, including $1.2 trillion in liquid assets.

AS WELL AS CHANGES IN WHERE IT’S MADE, HOW IT’S MADE WILL BE DIFFERENT TOO.

PART II: THE NEXT 10 YEARS IN WEALTH & LUXURY

DECADES OF WEALTH 4

A sizable cohort of second generation wealthy has started to emerge already in China, Brazil and a handful of other more established, emerging markets. Over the coming decade, this group will balloon in size. Among the global UHNW population today, 18% inherited their wealth, 63% were self-made, with the rest having a combination of both. Over the next decade, however, the share of those whose wealth is inherited will grow by more than 2%.

THE NEXT DECADE WILL BE TYPIFIED BY CONSOLIDATION

The past decade has seen great growth in entrepreneurship and the number of new businesses started. The growth of the Internet has been the primary driver, enabling instant access to new markets, often with disruptive business models. The zeitgeist has also favoured the small challenger over the established monolith and the global financial crisis spurred many to create their own employment opportunities.

IN THE COMING DECADE THE PENDULUM WILL SWING THE OTHER WAY

We anticipate that big businesses will increasingly acquire smaller businesses now that the former are settled and profitable again. They will also use those increased profits to outspend their smaller competitors in marketing and communications, making it increasingly harder to survive as a small player. Larger businesses have also caught up technologically, and there is now less disruptive invention in the main consumer goods industries that account for most of personal consumption globally.

In the next decade, we expect to see a rising number of new wealthy being created as a result of the sale of their businesses. We also foresee more wealthy individuals being created from high income and bonuses from executive roles in large businesses, as the latter grow in size and complexity.

PART II: THE NEXT 10 YEARS IN WEALTH & LUXURY

DECADES OF WEALTH 5

THE BEHAVIOUR OF WEALTHTHE RAPID RISE OF TASTE

The world’s newly wealthy will rapidly become more discerning luxury consumers. China is often cited as a market that has surprised observers with the speed of its move from conspicuous consumption to careful, tasteful purchasing. However, the country is far from unique – we believe all other emerging markets will follow this fast trajectory, fuelled by four factors:

n Newly wealthy consumers are travelling overseas more regularly and more

widely, where they are exposed to global luxury styles and tastes – they quickly

spot that most established wealthy have a wide repertoire of brands.

n Many newly wealthy consumers, or their children, are educated overseas.

As such, their exposure to – largely western European or North American –

established wealth and luxury purchasing behaviour is seen first-hand among

their peers.

n Media is now fully internationalised and universally available, ensuring the

rapid spread and consumption of trends and styles.

n Much has been made of the different behaviours and consumption patterns of

those new to wealth compared to those with established wealth – observations

in increasingly disparaging terms. As such, the newly minted are even more

quickly aware of the need to learn and behave like individuals with established

wealth.

The rise in discernment amongst the world’s wealthy will not only affect the brands they buy, but it will also affect what they buy. Increasingly, the wealthy will spend more on experiential luxury and less on physical luxury, as has already become the case amongst the wealthy in Europe and North America.

THE WAY WEALTH IS USED WILL ADAPT AND CHANGE.

PART II: THE NEXT 10 YEARS IN WEALTH & LUXURY

DECADES OF WEALTH 6

A GROWING COLLECTIVE ANXIETY

The wealthy have increasing concerns about the economy, geopolitics, wealth preservation, privacy and their own health. The proliferation of on-demand media and globalisation provides ever greater knowledge and awareness, leading to increasing concern on the part of wealthy regarding the macro-economic environment. On a more personal level, advances in medicine have increased their awareness of health issues.

The wealthy will also remember the recent financial crisis and be mindful of the potential for history to repeat itself. If it does, the wealthy have more to lose than others, even if they may have a larger cushion. The wealthy, particularly those in retirement, will increasingly be concerned about the preservation of their assets and take a more active role in securing them.

One result will be the desire to research and to monitor everything more closely – from financial holdings, to personal health, family, holidays, and other interests. And what can be measured will be managed.

Another area of anxiety for the wealthy is the proliferation of wealth itself. As wealth becomes truly globalised, the exclusive clubs and resorts that were once the preserve of a like-minded few will become over-run by people with whom they may not wish to share space. So where should they go to achieve the privacy and exclusivity that wealth should bring?

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PART II: THE NEXT 10 YEARS IN WEALTH & LUXURY

DECADES OF WEALTH 7

SOME IMPLICATIONS FOR BRANDSLOCALISATION: A DECADE OF SPECIALISATION

The past decade has been characterised by internationalisation, yet the coming decade may see a slowing of this trend. Wealth creation will no longer follow a linear trend and increasingly certain nations will have specialisations.

In the coming decade, it will be increasingly important to segment and understand the wealthy at a more detailed level – most likely defined by cities within countries. It will also be increasingly important to prepare for the non-linear development of economies and wealth creation.

FRONTIERS: PUSHING EXTREMITIES WILL GENERATE NEW SPENDING AND OPPORTUNITIES

The wealthy have always been among any early adopter group. We expect new frontiers to become the focus of both luxury consumption and of investment.

Globalisation and connectivity has meant that exclusivity and novelty are now much harder to find. As a result, extreme frontiers such as space travel or underwater holidays will become more popular. In finance, investments in established stock markets will become increasingly safer plays, with asset management aimed at wealth preservation. Instead, to grow wealth, investments will need to be increasingly focused in riskier markets and newer sectors.

COMBINING THESE INSIGHTS, WE BELIEVE THERE ARE A NUMBER OF KEY IMPLICATIONS AND OPPORTUNITY AREAS FOR BRANDS THAT SERVICE THE WEALTHY

PART II: THE NEXT 10 YEARS IN WEALTH & LUXURY

DECADES OF WEALTH 8

EXPERIENTIAL: SPENDING MOVES SLOWLY AWAY FROM OBJECTS

Growing discernment, and the advances in production methods to the point of plateau in terms of “discernible difference”, will increasingly shift luxury consumption away from products and toward experiences. This change will be based around travel, entertainment, health, and social interaction, and we expect high-end businesses in these sectors to thrive.

Luxury products will still continue to be purchased, of course, but the balance will shift and we will see service become a strong differentiator for luxury brands that sell prestige products.

EXCLUSIVITY: FUNDAMENTAL RARITY AND GROWING PERSONALISATION

It will be increasingly hard to maintain exclusivity of a product or service if this exclusivity is based on only a high price-point or a limited production quantity. In the coming decade, only fundamental rarity – something that, no matter what, is in finite supply – will remain exclusive.

As well as fundamental rarity, personalisation will be the second major driver of exclusivity in the next decade. This will be manifested in tailored and unique products, through to one-off experiences. The next decade will also see major advancement in CRM and data analytics as a means to increasingly personalise communication, service and new product development.

INTIMACY: PRIVACY AND CLOSENESS WILL GAIN IN IMPORTANCE

We expect an increasing desire for privacy amongst the wealthy in the future, yet at the same time a desire for greater intimacy amongst the select providers in whom they trust.

Private member clubs will gain prominence again, and we also expect to see luxury brands emerging that will only sell products to members or selected consumers. Yet for those members, the levels of personalisation and tailored service will push new boundaries. In wealth management, we anticipate more firms “choosing” their customers, and also developing their offerings to provide a much more holistic management of their client’s wealth – from non-financial assets to their broader lifestyle, such as health and security.

PART II: THE NEXT 10 YEARS IN WEALTH & LUXURY

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