The recent depreciation of the British pound has resulted in France overtaking the UK as the world’s fifth-largest economy. Our data shows that the UK will also fall in the wealth markets classification, this time behind Germany.
Our Global Wealth Market in 2016 report provides an overview of the world’s biggest wealth markets in terms of onshore liquid assets held by a country’s residents. Since China surpassed Japan and took second place in our 2013 ranking, the top five has remained unchanged. The US has been dominant, and will maintain its position as the world’s largest market in aggregate terms. And the UK, mainly thanks to its fast-growing HNW population, has been ranked fourth ahead of Germany.
But this is set to change. Internally, the UK population will continue to grow its assets faster than Germany, and indeed most of Western Europe. However, exchange rate fluctuations will affect the international position of the market. Our Global Wealth Model methodology uses end-of-year rates, so the UK still benefits from the strength of the pound in 2015. But the British currency has lost around 10% to the euro since July 2016, when the country voted to leave the EU. This will result in Germany pushing the UK down to the world’s fifth-largest wealth market.
The UK is not the only country whose ranking and relative growth is affected by currency volatility. Over 2011–15, Russia was among the top 10 fastest-growing markets in local currency terms. And quite paradoxically, its strongest yearly growth was recorded in 2015, when the country was in the middle of an economic crisis. Yet a different picture emerges when exchange rates are taken into account. In US dollar terms, Russia turns out to be one of the worst performers globally, as the Russian ruble has been constantly depreciating since 2013.
International wealth managers are very aware of the role exchange rates play in the financial markets, as their own businesses are affected by these. However, they cannot afford to forget their clients. The average UK HNW individual will not be bothered by the country’s declining ranking in the wealth markets classification, but they are likely to notice that purchases made abroad will be more expensive than a few months ago, and will ask their financial advisors what can be done about it. This is especially relevant given that only a few wealth managers expected the UK to vote in favor of Brexit – otherwise they would have adjusted investment portfolios to benefit from it in advance.
Meanwhile, according to our 2015 and 2016 Global Wealth Managers Survey, UK HNW investors’ allocations in foreign currency halved in the last 12 months, limiting the opportunity to benefit from the weaker pound. Wealth managers should adjust portfolios quickly and play the volatility to their advantage.
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