Confirming fears that tumbling markets in 2008 hit the assets of the world’s rich, Merrill Lynch/Capgemini’s annual report on this sector showed that wealth of high net worth individuals fell by 19.5 per cent last year while the population of this group fell by 14.9 per cent.

Although markets have since recovered somewhat since 2008, when the MSCI World Index of developed countries’ shares plunged by around 40 per cent, the data suggests that HNW and ultra HNW individuals will require further market gains to replenish their finances to pre-crisis levels.

The growth of the world’s wealthy population in recent years, driven by the long stock market boom, the collapse of the former Soviet Union, globalisation and the entry of emerging market economies, has largely explained the rapid growth in wealth management services around the world, including the entry of Western banks into fast-growing economies such as India. Even so, data shows that despite the recent turmoil in its own economy, the US remains the biggest single wealth management market.

Looking ahead, the report’s authors predict that HNW individuals’ financial wealth will grow to $48.5 trillion by 2013, advancing at an annualised rate of 8.1 per cent, arguing that this growth will be driven by the recovery in asset prices as the global economy and financial systems stabilise.

Also, the drive by investors into safer, low-margin products is expected to ease, encouraging HNW individuals to return to higher-risk/higher-return assets, and away from capital-preservation instruments, as conditions improve, the report said.

Merrill Lynch and Capgemini said they expect North America and Asia-Pacific to lead the growth in HNW individuals’ financial wealth, and predict Asia-Pacific will actually overtake North America by 2013.

Among the details of the thirteenth annual report by Merrill Lynch and Capgemini, it noted that the population of HNW individuals – defined as those with assets of $1 million or more, excluding collectables and their main residence – stood at 8.6 million at the end of 2008, while their wealth was collectively worth $32.8 trillion, representing a sharp reverse from the strong gains in 2006 and 2007. Between 2005 and 2007, annual growth in the population of wealthy people was 7.2 per cent, and their wealth expanded over that period by 10.4 per cent.

The biggest falls in the HNW population in 2008 occurred in the three largest regions: North America (-19.0 per cent), Europe (-14.4 per cent) and Asia-Pacific (-14.2 per cent).

The number of HNW individuals in the US fell by 18.5 per cent in 2008, but the US remains the single largest home to HNW individuals, with its 2.5 million of them accounting for 28.7 per cent of the global HNW population. In Europe, meanwhile, this population decline varied widely by country. For example, the number of HNW individuals shrank by 26.3 per cent in the UK, but just 12.6 per cent in France and only 2.7 per cent in Germany, which avoided a steep contraction in part because people were more heavily invested in conservative asset classes than those in other countries, the report said.

Japan, which accounts for more than half of the HNW individuals in the Asia-Pacific region, suffered a relatively mild population fall of 9.9 per cent. By contrast, the population of HNW individuals in Hong Kong plunged by 61.3 per cent and India fell by 31.6 per cent.

“The apparent resilience of Japan, however, stemmed largely from the fact that the expansion of the HNW population there had already been capped by the 2007 slowdown in macroeconomic growth and a weakening stock market (market capitalisation was down 11.1 per cent in 2007),” the report said.

The contraction in the overall HNW population was aggravated by the steeper-than-average decline (globally and regionally) in the number of Ultra-HNW individuals. A decline in this category has a disproportionate effect on overall HNW individuals’ wealth, because so much wealth is concentrated at their level. By the end of the 2008, UHNW individuals accounted for 34.7 per cent of global HNW wealth, but only 0.9 per cent of the total HNW population, showing how dramatic the skew towards UHNW population is.

“The sharp decline in the number of UHNW individuals globally (-24.6 per cent) largely resulted from that group’s partiality for more aggressive products, which tend to deliver greater-than-average returns in good times, but delivered hefty losses in 2008,” the report said.

Nick Tucker, market leader for UK and Ireland, Merrill Lynch Global Wealth Management, told WealthBriefing at a press event that although not surprising, it was “very noteworthy” that the number of UHNW individuals had declined faster than HNW individuals for the first time in recent history. UHNW individuals “probably have a more aggressive investment profile” he said, adding that many in this group would have been hurt by having less liquidity, a higher exposure to hedge funds and private equity, and a greater use of leverage.

As has already been noted, the report pointed out how wealthy investors piled into cash and other, supposedly low-risk assets as the financial turmoil continued: the share of wealth exposed to stocks fell by eight percentage points to 25 per cent in 2008.

Looking forward, the report predicted that HNW individuals are likely to remain fairly conservative investors in the short term as capital preservation continues to be prioritised over the pursuit of high returns. However, looking forward to 2010, the portfolios of HNW individuals are likely to shift as economic conditions improve, the report said, with investors making a tentative return to equities and alternative investments as regain their risk appetite.