The coffers of the wealthy

10 June 2021 Myra Knoesen

The COVID-19 pandemic, according to Christelle Colman, Managing Director of Elite Risk Acceptances, a subsidiary of Old Mutual Insure, increased the coffers of the wealthy, which effectively unleashed pent-up demand, resulting in a spending spree by the rich on fine wine and whiskey, diamonds, classic cars and other alternative asset classes.

Mohammed Yaseen Nalla, Founder of Magic Markets and a CFA Charter holder, who provided insights into how SA stacks up in the global wealth stakes at the Elite Wealth Conference said that globally, over 50% of wealthy people saw their wealth either stay the same, or increase, during 2020.  “The wealthy who made money during the pandemic did so because of global exposure,” said Nalla.

Global versus local UHNWIs

“Firstly, wealth refers to the net assets of a person. It includes all their assets (property, cash, equities, business interests) less any liabilities,” said Soul Abraham, Chief Executive of Old Mutual Insure Retail. 

In terms of the global overview of the number of Ultra-High-Net-Worth Individuals (UHNWIs) per region Abraham said, “North America has the biggest wealth market in the globe, with the largest number of UHNWIs numbering 190 888. They are followed by Europe with 151 665 UHNWIs, then Asia with 116 697; the Middle East with 29 880, Latin America with 16 504, then Russia with 10 289. Africa and Australasia have the same number of UHNWIs, numbering 3 270.”

“According to the 2021 Wealth Report, South Africa is the largest wealth market in Africa, and the 32nd largest worldwide (in terms of total wealth held). South Africans together hold US$636 billion in wealth. There are 2 030 multi-millionaires living in South Africa, each with net assets of US$10 million or more. There are 92 centi-millionaires living in South Africa, each with net assets of US$100 million or more. There are five billionaires living in South Africa, each with net assets of US$1 billion or more,” added Abraham. 

“Over the past 10 years, there has been a movement of funds away from real estate towards equities and alternatives. The average South African HNWI currently holds around 20% of their wealth offshore. This compares to 14% a decade ago. Popular foreign investments for South African HNWIs include: US ETFs, US$ cash and UK second homes,” emphasised Abraham. 

When looking at the top risks facing this space Abrahams highlighted four risks. These include, “the coronavirus (the impact of the crisis on wealth and employment will be crucial), safety concerns, loading shedding and Eskom (the troubled power utility has a massive amount of influence over South Africa), and the possible nationalisation of the healthcare sector (this could damage the private healthcare system, which could cause large numbers of wealthy and middle-class people to leave the country),” he said. 

“The South African luxury sector creates various opportunities for the economy to grow, while addressing unique challenges that plague South Africa's wealthy when protecting their wealth against risks. We see that the ultra-rich tend to underinsure when it comes to luxury items and over-insure against low-risk threats. This can be especially devastating for those with sentimental investments such as jewellery, art, classic cars or wine,” added Abraham.  

Alternative asset classes

“We continue to see that the ultra-high net worth investor, informed by uncertainty, looks for alternative asset classes to diversify portfolios and provide resilient returns throughout different stages of the pandemic,” said Colman.

Bloomberg predicts that cask whiskey is to be one of the biggest alternative investments in 2021, while the Liv-ex Fine Wine 1000 suggests that the value of fine wine has shot up by 200% over the past decade.

In line with this, Marcus Allen, Director of Development at London-based Cult Wines, together with Aarash Ghatineh, Executive Director at Cult Wines, spoke about wine as an alternative investment class at the Elite Wealth Conference.

According to Allen and Ghatineh, “Alternative investments can be considered those that are outside the traditional investment set of equities, bonds and currencies. Investors typically seek alternative assets to diversify their portfolios, provide a hedge against market volatility, and potentially enhance long-term returns. Fine wine satisfies many of these aims. The Liv-ex 1000 benchmark, the broadest measure of the fine wine investment universe, has maintained a low correlation to equity markets over multiple time periods. It also experienced shorter and less severe downturns than most mainstream markets during the global financial crisis in 2008, and the coronavirus volatility in early 2020. For many, wine investing also incorporates their ‘passion’ alongside its financial benefits, making it a unique alternative investment experience compared to mainstream assets.” 

“As a tangible asset, the supply and demand of fine wine forms a significant driver of price and underpins its distinct characteristics as an alternative asset. Supply is limited with only specific vineyards in certain wine growing regions having the necessary qualities and recognition to produce top quality wines. Leading producers make a finite quantity in each vintage as volumes are strictly controlled by the various Appellations d’Origine Controlee (AOC) in France, and their equivalent in other countries. As for demand, increasing consumption, especially from countries like China and South East Asia, creates growth. Although macro events such as the Coronavirus pandemic or trade barriers can temporarily impact demand, the long-term trends remain positive,” they said. 

“Only around 1% of all wine made in the world qualifies as investment grade. The main criteria used to assess a wine’s investment potential are a producer’s brand prestige and history, vintage quality, volume produced, market liquidity and drinking windows/longevity. Wine critic scores are also an incredibly important variable looked at to assess investment potential. As the wine investment market grows and data becomes more widely available, historical price performance and relative value analysis against other wines and other investments have become essential criteria to consider as well,” they added. 

The market outlook

“Fine wine, as measured by the Liv-ex 1000 index, posted a healthy 2% growth in 2020, overcoming disruption from the Coronavirus pandemic and US tariffs on many European wines. With a long-term compound annual growth rate at close to 8% (going back to 2004), we believe growth could accelerate as vaccine rollouts allow major economies to reopen. The suspension of US tariffs on EU wines has already shown evidence of providing a near-term boost,” they said. 

“Looking longer term, fine wine’s recent stability in the face of the Coronavirus pandemic will likely raise its credentials as an important component in a balanced investment portfolio. Alternative assets, overall, are growing in popularity amid the current unprecedented backdrop in traditional financial markets. That does not mean fine wine is immune to bumps along the way, should trade barriers or recurring pandemic-related disruptions occur. However, increasing diversification of both supply and demand in the global fine wine market in recent years means that a negative impact on one fine wine region could be another region’s gain. In this environment, it helps to adopt a selective, research-based approach to uncover emerging opportunities,” concluded Allen and Ghatineh. 

Colman concluded by saying, “As the numbers of the super-rich rise, wealthy individuals should carefully consider their unique risks and remember that it pays to insure collectibles and assets.”  

Writer’s Thoughts:
Informed by uncertainty, there is valuable insight for brokers in this market, to uncover emerging opportunities. Do you agree? If you have any questions please comment below, interact with us on Twitter at @fanews_online or email me - [email protected]

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