They’re known as the “BRIC billionaires.” They are the super-rich tycoons from the BRIC bloc of countries — Brazil, Russia, India and China — who have been snapping up companies worldwide in recent years.
In 2007 alone, Stelco Inc., Magna International Inc., Inco Ltd. and Alcan Inc. were all packed, whole or in large part, into foreign suitcases and carted out of Canada. On the international stage, Citigroup Inc., UBS, Morgan Stanley, Corus Group, IBM Corp., Maytag Corp. and Standard Chartered Bank have all sold substantial parts of their businesses to BRIC billionaires.
It’s a global shopping spree that represents the largest transfer of wealth among nations in history. And it doesn’t seem set to stop any time soon. The club of rich nations that dominated the world economy for the past six decades is now admitting new members.
Characterized as emerging economies by the World Bank in Washington, D.C., these are nations with gross national per-capita income ranging from $906 to $11,116. They are home to 84% of the world’s population and 60% of the growth in global gross domestic product.
With economic growth hovering around 10% in the BRIC bloc and around 6% across the emerging economies, many of these countries are also home to swelling numbers of the world’s rich.
“The axis of wealth and power is shifting,” says Allan Conway, head of emerging-markets equities for money-management giant Schroders PLC in London. “It’s a straight reflection of the growing importance of these economies.”
Of the 946 billionaires tallied worldwide in 2007 by Forbes magazine, 178 were newcomers. These included 19 Russians, 14 Indians and 13 Chinese. There are now also 24 Mexicans on the list, whereas 20 years ago, Forbes could identify only one Mexican billionaire.
“Emerging-markets tycoons will continue to steal the spotlight,” says the magazine’s editor, Luisa Kroll, of the 2008 Forbes list.
RECORD NUMBERS
A record number of billionaires from the BRIC bloc are expected to surface when the magazine does its 2008 tally. “One of these countries,” she says, “will also overtake Germany, the long-time No. 2 to the U.S., in terms of the nation that is home to the most billionaires.”
Chances are that Russia will be the country taking Germany’s place on the Forbes list. Although all the BRIC bloc countries boast dramatic wealth statistics, Russia’s wealth snapshot is extravagant.
With 50 or more billionaires on the lists compiled by the head counters at Forbes and London’s Sunday Times, there are now twice as many super-rich in Russia as in Canada. That’s an amazing development for a, until recently, deeply depressed country that had per-capita GDP of about $12,000 — or one-third the Canadian figure.
Beyond billionaires, in the broader category of high net-worth individuals with assets worth more than US$1 million, once again, Russia and Canada are a study in contrasts.
Growth in HNW individuals has decelerated in Canada to 6.9% in 2006 from 7.2% in 2005, while growth in HNW individuals in Russia has surged by 15%, according to an annual international survey of HNW trends produced by Paris-based Capgemini Group and Merrill Lynch & Co. Inc. of New York.
The two firms attribute much of Russia’s wealth boom to the strength of several major initial public offerings and the liberalization of the country’s banking market. Share prices of several Russian banks experienced triple-digit growth in 2006.
In the U.S., the HNW population expanded by 9.4% in 2006, after growing by 6.8% in 2005. That’s impressive — until you consider that India’s HNW population expanded by 20.5% in 2006.
China is also host to a huge HNW boom. In October 2007, thanks largely to stock markets that have doubled in the past year, China was home to 345,000 millionaires, an 8.7% increase over 2006.
The Merrill Lynch/Capgemini survey report estimates that in 2006, 9.5 million people globally each held more than US$1 million in financial assets, an increase of 8.3% over 2005. Globally, HNW wealth totals US$37.2 trillion, representing an 11.4% gain over 2005. The report suggests HNW financial wealth is expected to reach US$51.6 trillion by 2011, growing at an average annual rate of 6.8%.
Much of this growth can be traced to emerging markets registering strong advances in market capitalization, aiding wealth creation in regions such as Latin America, Eastern Europe and Asia-Pacific.
@page_break@Asia-Pacific was home to five of the 10 fastest-growing markets for HNW individuals, including Singapore, India and Indonesia. In these countries, the HNW populations grew by 21.2%, 20.5% and 16%, respectively, compared with the global HNW expansion of 8.3%. Korea and Hong Kong were also in the top 10 fastest-growing markets in the world.
Latin America’s HNW population also grew faster than the global average, expanding by 10.2% in 2006, up from 9.7% in 2005. Wealth in the region grew by 23.2% in 2006.
In the Middle East, the wealthy elites of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates are flourishing, as the Middle East’s HNW population expanded by 11.9% in 2006, up from a 9.8% growth rate in 2005.
$30 MILLION-PLUS
In large measure, the HNW boom is driven by the world’s wealthiest people — “ultra-high net-worth” individuals, whose financial assets exceed US$30 million, the Merrill Lynch/Capgemini report says.
In countries with relatively small per-capita GDP, such as India and China, “this sort of wealth is astronomical by most measures of their economies,” says Raj Desai, a visiting fellow with the Brookings Institute in Washington, D.C., and a professor at Georgetown University’s School of Foreign Service.
In 2006, the number of ultra-HNW individuals in the world is estimated to have grown to 94,970, an 11.3% gain — on top of a 10.2% gain in 2005.
This is a pattern that makes emerging-markets analysts such as Schroders’ Conway wary. His view is that the massive accumulation of extreme wealth in a small number of hands represents a risk to the economies generating this wealth.
“It’s crucial that you get trickle-down,” Conway says. “If you don’t see wealth trickling down in these economies, you will get instability. It’s vital that the new rich reinvest in their economies. If you look at China and India, you see a strong record of that. Russia is something of an exception.”
Desai feels the growing concentration of extravagant wealth in many countries is often the legacy of cronyism. “The extremely uneven playing field is of deep concern,” he says. “In many of these plutocracies, ‘crony capitalism’ has high costs.”
Desai doesn’t deny that “tremendous industrialization and economic growth has occurred,” and that companies acting as “national champions” in BRIC countries can act as locomotives propelling broader economic growth in much the same way as Korea’s famous chaebols have done.
But often these companies are led by ultra-rich individuals who are offered inside deals on public assets, such as Carlos Slim, the enormously wealthy Mexican who has gained control of his country’s telephone monopoly.
Companies controlled by highly connected political favourites are often less productive than companies created by genuine entrepreneurs.
“The evidence is mixed,” Desai says, as to whether people made enormously rich through political favouritism — a common description for many BRIC billionaires — generally bestow economic benefits. “We did a survey and found that the most politically favoured companies are the least productive. But there are examples of people who have benefited from wealth transfers from the state who have gone on to build empires and raise capital under competitive conditions.”
MAGNA DEAL
Desai points to Russian billionaire Oleg Deripaska’s Basic Element Group, which last year bought a major stake in Aurora, Ont.-based Magna International Inc. Basic Element is an example of a company — launched a decade ago amid evidence of corruption and cronyism — that now seems determined to help forge Russia’s ongoing reindustrialization.
But tracking whether the BRIC billionaires are reinvesting the balance of their wealth at home or squirrelling it abroad is a tricky task. According to the Merrill Lynch/Capgemini report, in 2006, large numbers of HNW individuals shifted their allocations from “alternative investments” — including hedge funds, structured products, foreign currencies, commodities, private equity/venture capital and derivatives — and into commercial real estate and REITs.
“Global direct real estate transaction volumes reached US$682 billion in 2006, up 38% from 2005,” the report notes.
Whether the swelling flow of wealth into real estate will prove beneficial in emerging economies is something that puzzles analysts such as Nancy Birdsall, president of the Center for Global Development in Washington, D.C., and former executive vice president of the Inter-American Development Bank.
EYE ON MIDDLE CLASS
Birdsall strongly recommends that investors concerned about the direction in which the emerging economies are being steered by their increasingly wealthy and powerful elites keep their eyes on data regarding middle-class income growth — even as they hear about the growing number of rich people in these countries.
“You can use the increase in the middle class in these countries as a proxy for their underlying economic health,” she says, noting that the middle classes in mature economies act to enforce government accountability while driving consumption.
“The explosion of the super rich in emerging economies can lay the roots of political disaster,” Birdsall warns. “Investors looking at the emerging economies should probably demand more information about the middle class in these countries than they do about
the rich.” IE
BRIC billionaires become a global force
But instability in emerging economies could follow if the wealth is not shared to create growth in the middle class
- By: Paul Webster
- February 20, 2008 February 20, 2008
- 10:33