Global Wealth and the Long-Term Investor

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Ashley Kindergan
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How wealthy has China become? At last count, the country accounted for a full 8 percent of all global ultra-high net worth investors—those worth more than $50 million. What will those UHNWIs do with that newfound wealth? That’s an important question, because household wealth is a key driver of consumers’ consumption and investment decisions as well as entrepreneurial activity, and that holds true whether one is Chinese, American, or otherwise.

China and the United States led the world in wealth creation over the past year, while other countries saw their relative wealth decline as a stronger dollar reduced the value of many assets denominated in local currencies. In its sixth Global Wealth Report, the Credit Suisse Research Institute provides a comprehensive view of household and per-capita wealth all over the world. In research derived from that report, analysts give several key takeaways for investors with a long-term focus.

USA Leads Wealth Creation…

American household wealth grew by $4.6 trillion to $86 trillion between mid-year 2014 and mid-year 2015, an increase of 4.5 percent per adult. Average American net worth is $352,996, 21 percent higher than before the financial crisis, but the country’s median net worth is just $49,787, with the gaping difference between the two explained by the fact that the U.S. has a high proportion of the world’s wealthiest people. The United States has 15.6 million millionaires, nearly half the global total, and is home to 48 percent of the world’s 123,800 ultra-high net-worth individuals. China has the second-highest share, the aforementioned 8 percent.

Investment implications: Demand for the services of U.S. money managers is likely to continue growing, as will spending on higher-end brands such as Ralph Lauren, Phillips Van-Heusen, and Apple.

…But the Middle Class Is Squeezed

Here’s the flip side of the above: By Credit Suisse’s definition, some 38 percent of American households are middle class (wealth between $50,000 and $500,000), but they control just 20 percent of the wealth. Only Singapore, and Switzerland show similar disparities. In Switzerland, for example, the middle class comprises 44.5 percent of the population, but controls just 20 percent of the wealth.

In addition, the global middle class has yet to fully recover from the major hit it absorbed during the financial crisis. Between 2000 and 2007, 267 million people joined the middle class. Between mid-year 2007 and mid-year 2008, 115 million people dropped right back out again. Since 2008, the middle class has grown by just 26 million people. What’s more, the amount of wealth that the global middle class controls has grown much more slowly in the wake of the financial crisis than it did beforehand, and members of the European and African middle class are still poorer than they were before the financial crisis.

In other words, the global middle class is smaller than it was a decade ago, and the relative importance of the middle class to the overall economy in the U.S. and a few other places is falling. Recent gains in wealth have been concentrated disproportionately among the already wealthy, as opposed to the middle class. In the United States, Credit Suisse says the middle class share of wealth is being “squeezed by the exceptionally high wealth of the 12 percent of adults above middle class.”

Investment implications: As middle class consumers in the United States see their share of overall wealth decline, companies that appeal to value-conscious consumers – Amazon, Dollar General, Priceline.com, Wal-Mart, and more – should continue to be popular.

Watch the Emerging Middle

Some middles are different than others: While the middle class in America (and much of the developed world) has seen its share of the national wealth decline, those in the middle of the road in emerging markets are enjoying the opposite, with their combined net worth accounting for a growing percentage of the total in their respective countries.

The global middle class has grown from 524 million households in 2000 to 664 million in 2015, a 27 percent increase. Some 41 percent of them live in emerging markets, where the ranks of the middle class grew 3.3 percent a year between 2000 and 2015, compared to 1.34 percent in the U.S. China now has a larger middle class than the United States – 109 million people to 92 million. In Brazil, China, India, Indonesia, and Mexico, the middle class controls a disproportionately large share of wealth. India ranks among the most extreme examples, and the 3 percent of the households that qualify as middle class own 23 percent of the country’s wealth. In Mexico, 17 percent of households are middle class, but they account for 40 percent of the country’s wealth.

Investment implications: In countries where middle-class consumers play an outsize role in the economy, investors would do well to think about how to capitalize on their wants and needs. Because the recent appreciation of the dollar has diminished the spending power of middle-class households in the developing world, Credit Suisse suggests that investors steer clear of global luxury goods companies in favor of local brands – particularly technology or service-sector companies such as the Samsung Group’s Shilla Hotel and Resorts, Chinese Internet company Tencent, Mercado Libre (an Argentinian eBay), Indonesian retailer Matahari Department Store, and Mexican media giant Televisa.

Don’t Be Fooled By China’s Wobble

According to the Credit Suisse Research Institute, there’s only one word to describe China’s wealth accumulation: Relentless. Since 2000, China’s per-capita wealth has quadrupled to $22,513, and the country has more than a million millionaires. As of June 2015, the country’s total household wealth of $22.8 trillion trailed only that of the U.S.

That said, a yearlong boom in which Chinese stocks rose 150 percent came to a spectacular end just a month later. The Shanghai composite index is down 25 percent since the end of June, and the Chinese government devalued the renminbi over the summer, eroding the international purchasing power of Chinese citizens. But stocks account for just 10 percent of overall household wealth in China, and the country also has a high personal savings rate. In other words, it’s not about to fall off the global wealth podium any time soon.

Investment implications: China took just 15 years to grow from $6.3 trillion worth of wealth to $23 trillion – an achievement that took the United States 33 years between 1939 and 1972. Credit Suisse predicts that Chinese wealth will continue to grow at a rate of 9.4 percent a year over the next five years, at which time China’s population will be as wealthy as the U.S. was in 1988. Investors should seek out those companies best positioned to sate China’s growing consumer appetite over the long haul.