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December 16, 2012updated 05 Jun 2017 11:34am

US country survey: Fiscal cliff threatens recovery in US millionaires

The impact of the financial crash on the wealthy US population has, surprisingly, been marginal, new research suggests. Christopher Rocks looks at how the country’s HNWI sector, which has recovered strongly in recent years, could be threatened by the fiscal cliff

By Chris Rocks

Who would have thought? Five years after the onset of the financial crash, the number of US HNWIs has remained surprisingly buoyant, led by those in financial services. Political obstacles surrounding the ‘fiscal cliff’, however, are now threatening to unsettle this stable picture, just as the recovery is starting to take hold.

Recent research by WealthInsight, the London based global wealth consultancy, breaks down the US high net worth landscape and details how it will look in 2016.

United States 2012 Wealth Book: The American Dream Revisited looks at a review period stretching back to 2007 and a forecast period stretching to 2016. The report shows that the number of high net worth individuals (HNWIs), those with net assets of $1m or more excluding primary residences, in the US dropped in recent years as the US economy suffered its most significant downturn since the Great Depression. But growth in the country’s wealthy population is expected in the years ahead.

According to WealthInsight there were just over 5.1m HNWIs in the US at the end of 2011, 165,360 fewer than in 2007. These HNWIs hold $18.8trn in wealth, over a third of the total individual wealth held in the country. This is above the global average of 29%, indicating a relatively uneven spread of wealth.

In 2007 – prior to the Great Recession – there were over 5.2m individuals with net assets of $1m or more, excluding primary residences. The marginal, 3.1%, decline in the HNWI population between 2007 and 2011 emerged during the most severe downturn in the US economy since the 1930s. Real GDP fell nearly 5.1% between Q3 2007 and Q2 2009; total HNWI wealth fell by 36% in 2008 (see chart).

"Given the state of the broader economy, and the challenging environment for wealth formation, the performance of America’s wealthy has been reasonably strong in recent years," says Andrew Amoils, senior analyst at WealthInsight. Indeed, from the end of 2008 to the end of 2011, the US added more than 1.1m HNWIs, an overall increase of 28.6%.

Reasonably strong growth

Recent rises in stock markets and signs of recovery in real estate should bring the number of millionaires above pre-recession levels by the end of 2012. Looking forward, the total number of US HNWIs is forecast to grow by a fifth between 2011 and 2016, to reach 6.1m. HNWI wealth will see a larger percentage increase, growing by 25% to reach $23.5trn by 2016.

But, despite some improvements in the US economy, considerable downside risks remain. Ongoing political gridlock is blocking an agreement on fiscal policy. If a compromise is not reached before January 1 2013, the "fiscal cliff" would automatically follow: a combination of reductions in government spending and higher taxes which could extract about $600 billion- about 4% of GDP – from the economy and lead to another abrupt decline in HNWI wealth and volumes in 2013. WealthInsight projects that the number of US millionaires would fall 6% if the US economy flatlines in 2013 (see box).

Financiers lead the way

Despite the financial crash, financial services remains the leading sector for US multi-millionaires according to WealthInsight, accounting for almost a fifth of the country’s UHNWI population (see chart). As of 2011, there are over 6,600 US UHNWIs, individuals with net assets of $30m or more excluding primary residences, coming from the financial services sector.

Finance was also the fourth-best performing sector for US ultras between 2007 and 2011; the volume of UHNWIs coming from the sector increased by 12% during this time.

The fastest growing sector between 2007 and 2011 was retail, fashion and luxury goods, followed by energy and utilities. The worst performing sectors for ultras were transport & logistics and construction & engineering. Together these sectors account for 17% of American ultras, but are highly vulnerable to recession.

California dreaming

California, the most populous state in the country, has the highest number of UHNWIs. A total of 4,929 such individuals reside there. New York State comes a close second with 4,363 UHNWIs. Growth in New York ultras was better over the review period though, they increased in number by 4%, while the number of Californian ultras fell by 3%.

Connecticut was the state with the fastest growth in ultras over the review period; its UHNWI population increase by more than a quarter between 2007 and 2011.

Unsurprisingly given the financial sector’s prominence, New York City, the centre of the US financial industry, is by far the top US city by UHNWI population. There are almost 3,000 UHNWIs in the city, about three times more than Los Angeles in second.

An alternative future

In 2011, business interests was the leading asset class for HNWIs in the US (29% of total HNWI assets), followed by equities (26.7%), real estate (17.4%), fixed income (11.1%), cash (8.6%) and alternatives (7.3%). Fixed income products recorded the strongest growth over the review period, driven by a movement to safer asset classes. Equities and real estate registered the weakest performance, a result of the economic downturn.

Looking ahead to 2016 however, alternatives are expected to be the top-performing asset class for HNWIs, followed by equities, supported by the Federal Reserve’s policy of quantitative easing (QE).

Since the onset of the financial crisis, Fed Chairman Ben Bernanke has aggressively pursued an expansionary monetary policy. In September the Fed announced a third round of QE which currently sees it buying $40bn a month in mortgage-backed securities on an open-ended basis. Many wealth managers see the re-election of Barack Obama as reinforcing the Federal Reserve’s commitment to QE; a Mitt Romney victory might have altered the dynamic with Chairman Bernanke expected to leave the Fed in early 2014.

"The aim of QE, an unconventional form of monetary policy, is to stimulate economic activity by pushing up asset prices," Comments WealthInsight’s Andrew Amoils, "The policy has been good for US stocks [up 12% this year and by more than 100% since March 2009] and positive for HNWI wealth."

The American Dream may have lost plenty of shine since 2007, but signs are that its set to extend its position as the place more HNWIs call home than anywhere else well past 2016.

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