In an environment of high interest rates and inflation, high-net-worth individuals (HNWI) are increasingly modifying their primary asset allocations from preservation to growth and are looking to alternatives to do so.
Capgemini’s latest world wealth report, which reflects the views of over 3,000 HNWIs, 750 relationship managers, and 75 wealth management executives from around the world, found HNWIs increased their alternatives allocations to 15 per cent in 2024, up from 13 per cent in 2023. These allocations included commodities, currencies, private equity, hedge funds, structured products, and digital assets.
Particularly, HNWIs voiced a preference for private equity, with some 68 per cent planning to increase allocations to the asset class in 2024, driven by hopes for long-term higher returns and portfolio diversification.
The trend came alongside decreased allocations to cash and cash equivalents, which fell to 25 per cent in 2024.
“Early 2024 data reveal a normalisation of cash holdings to 25 per cent of portfolio totals, a stark contrast to the multi-decade highs of 34 per cent seen in January 2023. The report indicates two out of three HNWIs are planning to invest more in private equity during 2024, to leverage possible future growth opportunities,” Capgemini indicated.
In alternatives, there was also an increased interest in digital assets with 77 per cent of wealth management executives either maintaining or increasing their digital asset investments.
“HNWIs are becoming more interested in digital assets, especially cryptocurrencies. Half of the relationship managers we polled reported a surge in client interest and investment in crypto,” the report observed.
The recent decision by the US Securities and Exchange Commission (SEC) in January 2024 to approve bitcoin ETFs, too, fuelled interest in cryptocurrency allocations in portfolios, with offerings from Wells Fargo, Bank of America, Morgan Stanley, and particularly BlackRock, adding to HNWI interest.
Looking at other allocations, Capgemini found fixed income remained another popular asset class, with allocations increasing to 20 per cent in 2024, up from 15 per cent in 2023.
It observed: “Fixed income assets were complicated in 2023, as high inflation diluted inflation-adjusted (real) returns from fixed-income assets, even as interest rates were high, making them less lucrative for HNWI investors. However, the tide began to turn by Q4, and cooling inflation boosted fixed-income real returns.
“HNWI investors expect inflation to tone down further in 2024, even as elevated interest rates continue, making fixed income an attractive asset class.”
Meanwhile, allocations to equity fell slightly, down from 23 per cent to 21 per cent, despite “solid” stock performance, which Capgemini attributed to geopolitical tensions, high borrowing costs, and continued market volatility.
“Even as the Magnificent Seven outperformed the broader market, the S&P Index not including these stocks yielded a return of only 11.6 per cent,” it pointed out.
“Rising interest rates made traditionally safe assets like bonds more attractive. Therefore, the ‘hurdle rate’ shifted; the minimum return needed to justify equities’ risk changed. As a result, fewer stocks offered returns that outweighed potential volatility.”
Overall, the report found global HNWI wealth expanded by 4.7 per cent in 2023 reaching $86.8 trillion. Australia notched HNWI wealth growth of 7.9 per cent, behind India at 12.4 per cent.
“Wealth growth in both of these countries was driven by a resilient economy and robust performance of equity markets: the Indian benchmark index, the Sensex, climbed by over 18 per cent in 2023, and the Australian S&P/ASX 200 index gained 7.8 per cent during the year,” it explained.
