Stocks and Shares

How do you know if you’re rich?

A great many people spend too much of their time “keeping up with the Joneses”, those friends or neighbours with the shiny new car and designer kitchen extension. But the rat race is a global marathon and not a local sprint. Knowing who is moving up the pack is essential for investors who want to become financially independent.

If you have just US$3,210 worth of assets to your name then you’re already in the top half of the world’s wealthiest adults. That’s according to the Credit Suisse Global Wealth Report 2015, an annual piece of research packed with insights into the world of wealth.

The 50% of people with less than that own just 1% of the world’s estimated US$250 trillion of household wealth. Total household wealth includes both financial assets like bank deposits, stocks and bonds and non-financial assets, which are mainly houses.

Want to get into the top 10%? You’ll need assets worth US$68,800 or above. If you succeed you’ll join a group that controls nearly 88% of all household wealth.

That group of one in a hundred adults controls half of global household wealth.

Fancy yourself as a member of the much cited top 1%? Entry there requires total net assets worth US$759,900. That group of one in a hundred adults controls half of global household wealth.

The following chart of the world wealth pyramid gives more detail. Up the left hand side it shows the wealth groups by amount of assets. The right hand side shows how much wealth each group controls in total. The numbers in the middle show how many adults are in each group.

GlobalWealthPyramid

The top of the pyramid, shown in yellow above, has been broken down further. These are people with more than US$1 million in net assets. The top bracket of 123,800 people have over US$50 million of assets.

They are the “0.0017 per cent” – the “ultra high net worth individuals” or “UHNWIs”, to use financial industry lingo. Translation: the filthy rich. (Many of whom, that I’ve had the pleasure to know personally, actually being very clean and pleasant.)

topofthepyramid

But these snapshots only tell a small part of the story. Clearly there are rich countries and poor countries, not just rich and poor people. How wealthy someone feels will depend on where they live, not just how much they’ve got. US$1 million goes a lot further in India (average wealth US$4,352)  than it does in Switzerland (average wealth US$567,122).

It’s no surprise that most of the wealthiest people are found in North America, Western Europe and Japan. The next chart provides a snapshot of global wealth broken down by regions and deciles, meaning groups of 10% of the population. So the first decile is the poorest 10% in the world and the tenth decile is the richest 10%.

China and India are shown separately, because of their huge size. This means “Asia Pacific” excludes them but includes rich countries like Japan, Australia and New Zealand, middle income countries like South Korea and Taiwan, but also poor ones like the Philippines, Vietnam and so on. That’s why it’s spread so evenly across all deciles.

RegionalCompositionofGlobalwealth

India and Africa both remain poor and have few affluent or wealthy people. Plenty of the rich are based in Europe, but there are people across the whole distribution. This is because that region includes rich Western European countries like the United Kingdom or Germany, but also poor Eastern European countries like Romania and Albania.

North America, which means the USA and Canada, contains a high number of the wealthiest in the world, those in the top deciles. Perhaps surprisingly, it also includes 10% of the poorest decile (see the top left of the chart).

Apart from general destitution in many of the big US cities, such as Detroit, this is likely to be a result of the high debts of many Americans in relation to their assets. In particular young people with large student debts (US$1.2 trillion and counting) who haven’t yet had a chance to work off the loans and accumulate wealth. Many of them never will.

This huge country also contains relatively few of the world’s very poorest people.

But perhaps the most striking element of the chart is the middle income bulge in China, shown in yellow. This huge country also contains relatively few of the world’s very poorest people. That’s after more than three decades of economic reforms that have lifted hundreds of millions of people out of poverty.

Of course there’s still much to do. But the contrast between China and India is striking, despite similar populations of 1.4 billion and 1.25 billion respectively. That’s 19% and 17% of the world’s 7.4 billion humans.

There’s no question that China is well ahead of India when it comes to improving the situation of its citizens, now that the madness of hard core communism has been left behind. (That’s worth pondering before jumping to the conclusion that elective democracy is always and everywhere the best system of government. See here for more on China.)

all of these relatively poor regions have added around 300% to their wealth since year 2000.

But it’s also not to say that India isn’t making swift progress, or indeed the other developing regions such as Latin America and Africa. Measured in local currencies, all of these relatively poor regions have added around 300% to their wealth since year 2000. That’s the same as saying they have multiplied wealth by a factor of four.

Asia Pacific – excluding China and India – is held back by stagnant Japan, although there are plenty of smaller, faster growing countries there as well.

WealthGrowthPercentage

Of course not all developing countries are equal. Some emerging and frontier markets have been heading backwards, such as Argentina (although that country could be on the cusp of a new dawn).

However, taken as a whole it’s very clear that the world’s developing countries are creating wealth much faster than those that are already “rich” (translation: high income but also high debt).

What’s even more striking is how quickly this transformation is happening. China’s total household wealth was the same in year 2000 as the USA’s was in 1938, using constant exchange rates. By 2015 China’s wealth had grown to the same level as the USA in 1975.

In other words, in just the past fifteen years the Chinese created the same amount of private wealth that the USA took 37 years to achieve. We should remember that for most of that period, from 1938 to 1975, the USA was going through its post-great depression, post-second world war boom.

What’s more, Credit Suisse predicts that China will achieve the same wealth growth over the next five years as the USA experienced in the 17 years between 1975 and 1992.

TotalwealthintheUS

This transformation of China is even more remarkable when you realise that the USA’s population grew by 66% – from 130 million to 216 million – between 1938 and 1975, with a growth rate of 1.4% a year. That period included the so-called “baby boom” between 1946 and 1964, when 76 million new Americans were bred into the world. (Note: those babies have now started to retire.)

By comparison China’s population grew just 11% – from 1.26 billion to 1.4 billion – between 2000 and 2015, at a growth rate of 0.7% a year. In other words, wealth per person has gone up at an even faster rate, when compared to the USA during the 1938 to 1975 period, than total personal wealth in the country.

This speed of change – not just in China but throughout the world – is what is really crucial.

This speed of change – not just in China but throughout the world – is what is really crucial. It’s testament to what happens when you roll back years of fanatical political dogma and general meddling – be it rooted in communism, other forms of populism, military dictatorships or colonialism.

Give people more freedom and relatively stable conditions and they’ll go out and better themselves – at least in material terms. In recent decades they have done this in their hundreds of millions throughout the developing world. Tens of millions more are joining them each year.

This is a key reason why here at OfWealth we continue to be optimistic for the future of investments in the world’s emerging and frontier markets. That’s where most of the people are. That’s where personal freedoms are increasing and not decreasing. That’s where the economic growth is. That’s where most of the new wealth is being created. That’s where most of the best stock market investments are likely to be.

Especially now. After four years in the doldrums a great many emerging markets are cheap. Cheap stocks and growing strongly? Yes please. Investing in them might just help you stay ahead in the rat race – or even bring forward the day when you have the means to leave it altogether.

Stay tuned OfWealthers,

Rob Marstrand

robmarstrand@ofwealth.com

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.