Emerging multimillionaires

The number of multimillionaires in the major emerging markets will boom 76% growth by 2016. According to a report elaborated by WealthInsight—a British consulting company which provides data about the wealth sector—, the BRICS countries (acronym for Brazil, Russia, India, China and South Africa) are quickly gaining people with at least $30 million in their bank accounts, and Beijing and Shanghai have, each one, more millionaires than Los Angeles.

The study is focused on the so-called ultra-high net worth individuals, which means people with $30 million or more. The study shows that Beijing has 1,318 high net worth individuals, while Shanghai has 1,028. On the other hand, Los Angeles has 950 people with at least $30 million. New York city, however, remains the place with the most ultra-high net worth individuals: 2,929.

While Beijing is the largest BRICS’ city for multimillionaires, São Paulo, in Brazil, occupies second place, with 1,310 high net worth individuals, which means that there are more multimillionaires in São Paulo than in San Francisco, Washington and Miami together. In the third place is Shanghai (see the table above).

According to the report, Moscow has 821 high net worth individuals, which means the Russian capital has even more multimillionaires than Chicago, while Mumbai (with 577 individuals) surpasses Dallas.

And the growth rate will continue to increase fast in the BRICS countries. According to WealthInsight, in India, the multimillionaire population will more than double by 2014, reaching 511,000. China is in the second place: the number of high net worth individuals might grow 82%, while in Brazil the number will increase by 40%.

The report covered 30 cities in total. On the list, China has 12 cities within the 30 largest, while Brazil has nine. India, by its turn, has five cities and Russia, two. South Africa has also two cities. According to the report, at the end of last year, there were 1.9 million high net worth individuals in the BRICS countries, with combined wealth of $7.5 trillion.

BRIC’s future shines in 2013

There is a light at the end of the tunnel for investors next year, and this light is particularly bright for emerging markets. According to a report elaborated by Schroders, a British multinational asset management which operates in 26 countries, the global growth is likely to continue to struggle in the next year given the headwind from fiscal policy in the advanced economies, but 2013 might be a stronger year than 2012 in the emerging world.

For Schroders analysts, the emerging markets—especially the four BRIC countries (acronym to Brazil, Russia, India and China)—will face stronger activity next year, although the economic growth will likely remain below potential. “We believe the recent rebound in activity in the emerging world, particularly China, has enough momentum to generate a bright start to 2013; but we remain cautious that much of this is down to the global inventory cycle, and that final demand remains weak,” says the report.

In terms of China’s economic growth, it might sum 7.7% in 2012, but investors should be aware of the Chinese activity since a significant part of the country’s recovery might be driven by a favorable stage of the global inventory cycle and the final demand, which remains weak.

“Additionally, it seems that the official growth target of the Chinese government has become a more reliable indicator of policy measures,” says the report. “In previous years, it was not unusual for the target to be exceeded by several percentage points, but it seems the new target of 7.5% per annum reflects a more realistic assessment of the Chinese economy, and this has implications for the likelihood of stimulus measures being enacted to maintain the target growth rate.” According to the Schroders’ forecast, China might grow 8% in 2013, below the 8.1% market-consensus.

Brazil has experienced a recovery in the macro data in the second half of the year. For the Schroders’ economists, the largest Latin America country might grow at least 1% quarter to quarter in both the third and fourth quarters. “Though we should see growth nudge down a tick as 2013 wears on, it should remain robust throughout the year,” says the report. The firm estimates that Brazil will grow 3.6% in 2013, much more than the 1.5% estimated for this year. “Looking ahead to 2014, we expect continued improvement to a shade over 4%. The FIFA World Cup, held across Brazil in June-July 2014, should also boost activity.”

Brazil has been using all kinds of monetary instruments to revive its economy, and the Brazilian Central Bank has been reducing rates sharply. Over the past year, the monetary authority cut the country’s interest rate by 500 basis points, more than any other group of the 20 nations. Today, the Brazilian benchmark interest rate is 7.5%, a historic low level.

“With so much easing having taken place, we expect the BCB to maintain the current policy rate at 7.25% for some time, unless outside shocks create significant deterioration in the macro outlook,” says the Schroders’ report. “It is likely, however, that the strengthening of activity and the depreciation of the Real earlier this year will put upward pressure on inflation throughout 2013.”

The economic activity in Russia, on its extent, has been facing a slowdown in the second half of the year. The recent signs, however, suggest that this slowing may have stabilized, and Schroders estimates that Russia’ Gross Domestic Product (GDP) will grow 3.5% in 2012. “Activity is unlikely to be helped by the Russian Central Bank (CBR), arguably the most hawkish in the world at this time, having raised rates in September just prior to inflation breaching its official target,” says the report.

India is the only one within the BRIC countries which can frustrate investors. According to Schroders, the activity in India will continue to be muted and disappointing. “Getting a strong grasp on the Indian economy can be challenging, as data is often poor and subject to very large revisions,” says the report. “It is clear, however, that the global slowdown has affected India, with growth so far this year slowing below 6% for the first time since 2008-9.”

India’s GDP might grow 5.6% in 2012. For Schroders, India will continue to face “an unpleasant cocktail of institutional, structural and cyclical headwinds to growth”, says the report. “One major barrier to an improvement in the cyclical outlook for India has been the persistence of high inflation, and the reluctance of the Reserve Bank of India (RBI) to ease policy as a result.”

An island of illusion

The United States fiscal cliff has been dominating the financial market’s attention around the world. Many investors have been questioning where to put their money while the scenario becomes clearer. Some economists say emerging markets might be an interesting investment strategy, especially the BRICS countries (acronym for Brazil, Russia, India, China and South Africa). But are the BRICS nations really a refuge for fiscal cliff?

First of all, it is important to understand what is the so-called fiscal cliff and its impact in the United States economy. The fiscal cliff is the combination of expiring tax cuts and government spending cuts. Without congressional action, up to $600 billion of expiring tax cuts, new taxes, and automatic spending cuts are set to take effect at the end of 2012 or beginning of 2013. This means that this combination is a threat to the American economy which can be back into a recession.

According to the American multinational financial services corporation Fidelity Investments’ forecasts, if the expiring tax cuts, new taxes, and automatic spending cuts hit all at once, the impact could amount to as much as 4%-5% of the United States Gross Domestic Product (GDP). As a result, “some experts anticipate the economy would experience a significant slowdown and there would be major consequences for financial markets,” says Fidelity.

In this context, some analysts believe emerging markets—especially the BRICS countries—might be a refuge to investors since these countries do not have a fiscal cliff and their balances of payments are in good shape. For Antoine W. Van Agtmael, Ashmore Emm founder and author of "The Emerging Markets Cenutry", it is time to think risks in a different way. 

In an interview with Bloomberg, he emphasized that the debt/GDP (rate) in emerging markets is better, as long as their consumer level and economic growth. Although the emerging markets have been facing an economic slowdown, most of them will continue to grow more than the developed countries. Van Agtmael aso said that he was optimistic about the United States, and that investors should keep their portfolio diversified.

The emerging markets are not immune to the United States fiscal cliff impacts. These nations do not constitute an isolated island. It is clear that, in a globalized world, it is an illusion to think that these major emerging markets might perform well in the worst scenario compared to the American economy. The perspectives of these countries might be better in relation to the developed countries, but the sky does have clouds.

Companies focus expansion plans on BRICs countries

Brazil, Russia, India, China are inspiring more investment confidence in terms of business. According to a research conducted by accountancy firm BDO, half of chief financial officers (CFOs) from medium-sized companies are now investing in or planning to enter these markets, compared to only three out of ten in 2011.

Over 1,000 CFOs from mid-sized companies across 14 markets were interviewed. The report only refers to Brazil, Russia, India and China as the BRIC countries, which means the accountancy firm puts South Africa apart from the group.

According to BDO, CFOs are still pursuing international expansion in order to drive revenue, but they are more cautious about where they choose to invest. The “big seven” countries—China, USA, Brazil, India, Germany, Russia and U.K.—lead as the most attractive investment markets, due to size and customer potential, says the report.

China remained the top investment destination, followed by the U.S. Some 69% of CFOs cited China’s market size as a key advantage and 37% were attracted to cheap labor in the country. Brazil has moved up to third position, from sixth in 2011.

“There is a boom in the BRICs—45% of mid-market CFOs are focusing their expansion plans on the BRICs, compared to 29% in 2011”, says the report. According to BDO, the BRIC countries can no longer be termed emerging markets. “They are now seen to be preferred—and known—investment entities”, states the survey.

More than two thirds of CFOs see customer service delivery crucial for international growth, with Brazilian, British and South African companies ranking this the most highly. In terms of revenue, Indian and Russian companies have seen the highest average overseas revenue increases, 18% and 17% respectively, while Brazilian CFOs have reported the lowest increase (5%).

The eurozone crisis, however, is playing an important role, with CFOs from Brazil and China saying that it has had a large impact on their international expansion plans.

Reflecting on the global impact of the eurozone crisis, CFOs from countries both within and outside Europe said their investments were affected: Brazil (58%), China, Germany and India (each 54%), and the Netherlands (50%). The countries least likely to report that the crisis had impacted their international expansion plans are Japan, Australia, South Africa and Canada: around two thirds of CFOs from these countries said the eurozone crisis had had little or no impact.

“Brazil’s increasing investment appeal is now reflected in its top three ranking for general international expansion—it is the third most attractive market in 2012, up from sixth place in 2011”, says the report. “The appeal of Brazil is fairly consistent across the board in terms of sectors, and highest amongst CFOs in France, Canada and USA.”

In China and India, the investments have additional attractions: higher growth rates are a key factor for about half the CFOs investing there, and the cheap labour rate attracts over a third of investors. High growth rates are also important when considering expansion to Brazil. For Russia, attractive profit margins are an important factor, mentioned by over a third of respondents (36%).

In Brazil, a quarter (24%) of CFOs in the professional services sectors are planning to increase their investment in Brazil, compared to 15% overall. Approximately three of ten Chinese and American CFOs are also expecting to increase their investments.

Three of the four BRIC countries are considered amongst the top twenty risky markets; Russia ranks ninth, China thirteenth, and India twentieth (Brazil narrowly escapes, ranking twenty second). This shows that, while BRIC countries are attractive markets for investments, they also come with some risks.

http://static.bdo.uk.com/assets/documents/2012/10/BDO_Ambition_Survey_2012_151012.pdf

Be optimistic on BRICS

The discussion about the economic slowdown on BRICS (acronym for Brazil, Russia, India, China and South Africa) and whether these markets will be able to overcome their own challenges is becoming repetitive. It is true that the emerging markets’ economies have been decreasing, but it is important to consider that most of these countries are growing more than the developed nations.

The financial crisis has hit all the economies around the world, especially the export-oriented ones such as BRICS. This scenario has been seen since the second half of 2011, and particularly in this year, when many emerging markets started to fight against the slowdown in their gross domestic product (GDP).

There are, however, many reasons to be optimistic about BRICS. Firstly, the five countries did their financial homework. Their economic fundamentals are now more solid compared a decade ago. Together, the BRICS’ countries have the world’s highest volume of reserves, which sums up to more than US$ 4 trillion.

Secondly, BRICS still have room to use macroeconomic tools to stimulate their economy. Brazil, for instance, has been reducing its interest rates sharply in order to fight against its economy slowdown. Over the past year, the Brazilian central bank cut the county’s interest rate by 525 basis points, more than any other group of the 20 nations. The Brazil’s benchmark Selic interest rate is 7.25%—a historic low level, but still high compared to other emerging and developed markets. Besides, these five countries have been using expansionary fiscal policy to stimulate their GDP.

Thirdly, commodities prices might remain high. As the emerging markets are still growing, these countries will support the demand for commodities. Oil and metals prices might continue volatile, but the forecasts for agricultural commodities are still good.

Another reason to be positive on BRICS is their powerful consumer market. Brazil, Russia, India, China and South Africa account for over 40% of the global population and about 25% of the global GDP. According to some economists, Brazil might just grow 1.5% this year, yet retail sales are projected to increase from 7% to 8%. China and India’s population is massive, which puts these countries ahead of the game.

Finally, the BRICS countries have been working to increase their cross-border investments or even to create an alternative lender (the BRICS development bank) to the World Bank and other finance bodies. The bank might initially start with US$ 50 billion in capital.

BRICS: a factory of millionaires

The US dollar appreciation, the euro depreciation and the real estate prices slowdown have affected the number of millionaires around the world. The good news is that the number of wealth individuals might experience an increase in the next years. A research conducted by Credit Suisse shows that the number of millionaires worldwide is expected to increase by about 18 million, reaching 46 million in 2017. The world wealth, in its turn, may totalize US$ 330 trillion by 2017.

The future is particularly promising to emerging markets, especially to the BRICS (acronym for Brazil, Russia, India, China and South Africa). According to Credit Suisse, only China might add a total of US$ 18 trillion to the stock of global wealth in the next five years and surpass Japan as the second-wealthiest country in the world. The USA should remain on top of the wealth league though, with US$ 89 trillion by 2017.

“Assuming moderate and stable economic growth, we expect total household wealth to rise by almost 50% in the next five years from US$ 223 trillion in 2012 to US$ 330 trillion in 2017”, says the report. The emerging markets, however, have been raising their share of world wealth. “Over the next five years, we expect to see a big improvement in the position of emerging economies (…) We expect that emerging economies will continue to catch up with developed economies, that the middle segment will increase in importance and that the number of millionaires will rise significantly.”

Brazil has been called the “awakening giant” by the report since the country is expected to have a higher level of advance in the number of millionaires in the next five years. According to the research, Brazil will gain 270,000 new millionaires in the period, from 227,000 millionaires to 497,000 in 2017, an increase by 119%. This percentage is the highest one within the BRICS countries. “Similar to a number of other Latin American countries, Brazil has more people in the US$ 10,000–100,000 range relative to the rest of the world, but fewer numbers in each of the other ranges”, says the report.

Russia might experience a sharp increase in the number of millionaires as well. The forecast is that the number of wealthy people will advance 109% from 97,000 in 2012 to 203,000 in 2017. According to Credit Suisse, excluding small Caribbean nations with resident billionaires, wealth inequality in Russia is the highest in the world. “Worldwide there is one billionaire for every US$ 194 billion in household wealth; Russia has one billionaire for every US$ 15 billion. Worldwide, billionaires collectively account for less than 2% of total household wealth; in Russia today, around 100 billionaires own 30% of all personal assets.”

In India, the number of millionaires might grow 53% in the same period, from 158,000 to 242,000 by the year 2017. The study says that wealth growth has been quite steady since 2000 in India, increasing at an average annual rate of 8%. “Together with most countries in the developing world, in India, personal wealth is heavily skewed towards property and other real assets, which make up 84% of estimated household assets.”

The predictions for China continue to be encouraging. According to the report, the number of Chinese millionaires might increase 97%, from 964,000 to 1,901,000 in the next five years. According to the research, China’s total household wealth is the third highest in the world, 25% behind Japan and 59% ahead of France (in fourth place). Due to a high savings rate and relatively well developed financial institutions, a high proportion (47%) of Chinese household assets are in financial form compared with other major developing or transition countries”, says the report.

The report refers to South Africa as one of the most successful African economies and an exciting emerging market. “Unusually for a developing country, household wealth is largely comprised of financial assets, which contribute 70% to the household portfolio. This reflects a vigorous stock market and sophisticated life insurance and pension industries, which are key aspects of the strong modern sector of the economy.”

The report considers “wealth” the value of financial assets plus real assets (principally housing) owned by households, less their debts, and private pension funds. The research was made from 2011 and 2012, and refers to mid-year (end-June) estimates.

BRICS development bank: a dream comes true?

One more step was taken by the BRICS countries (acronym for Brazil, Russia, India, China and South Africa) to create their own development bank. Authorities from the five nations were in Tokyo, and they reported that some progress toward the creation of the bank was done. According to the Brazilian business newspaper Valor Econômico, the bank might initially start with US$ 50 billion in capital.

The idea is to establish a joint bank which could provide funding for infrastructure projects and sustainable development in the five countries and even for other emerging markets and developing countries. At the same time, the BRICS development bank might be an alternate lender to the World Bank and other finance bodies, although some analysts are skeptical about it.

The BRICS countries have different objectives. While India sees the bank as an economic project, China has a political view of it. The five nations, however, can change their role in the World Bank and in the International Monetary Fund (IMF).

The BRICS countries are important borrowers from the World Bank. In 2011, over US$ 7 billion were approved to them. The five nations have been increasing their contribution to IMF, and they want the fund to reform its quota system to enhance their representation. They are demanding voting shares in IMF, for instance. Starting a new development bank might provide a bargaining power.

As the contributions to the development bank will probably be equal, the countries will have an equal voting structure. On the other hand, this can limit the size of the bank, since China has more reserves than the others. Together, the five countries have the world’s highest volume of reserves, which sums up to more than US$ 4 trillion. Today, Brazil, Russia, India, China and South Africa account for over 40% of the global population and about 25% of the global gross domestic product.

If it becomes a reality, the institution would be the first major multilateral lender to emerge since the European Bank for Reconstruction and Development in 1991. The BRICS will meet again in Mexico City next month.