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  1. Wealth
December 3, 2012

WealthInsight: Fiscal Cliff threatens number of US millionaires

By Spear's

The number of millionaires in the US could drop by as much 6% in 2013, and HNWI wealth by about $240 billion, if the so called ‘fiscal cliff’ is not averted

The number of millionaires in the US could drop by as much 6% in 2013, and HNWI wealth by about $240 billion, if the so called ‘fiscal cliff’ is not averted. WealthInsight has prepared 4 scenarios, detailing the likely impact of the US fiscal policy standoff on the US HNWI population.

Key findings

· The total number of US millionaires (high net worth individuals, “HNWIs”) is forecast to grow by 4.3% in 2013.

· But if GDP growth were to drop to 0% in 2013, as the IMF predicts if the fiscal cliff isn’t averted, HNWI volumes would decline by 5.9% – a swing of over 10%.

· Even if the fiscal cliff is avoided, or is short-lived, “tiptoeing around the cliff-edge” has the potential to undermine economic growth and impact the US HNWI population in 2013:

– If the US were to “fall off the cliff” and GDP growth flatlines, the number of HNWIs would fall by 315,000 in 2013; HNWI wealth would fall by about $240 billion.

– In our ‘retrenchment’ scenario, a slowdown in annual GDP growth (to 1% in 2013) leads to a decline in the number of US HNWIs of 26,000; HNWI wealth would fall under this scenario by only $40 billion.

– In our ‘steady’ scenario, GDP growth continues as forecast (2.1% for 2013) and the number of millionaires increases by about 230,000 compared with 2012; HNWI wealth in 2013 increases by just over $1 trillion.

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– If the threat of the fiscal cliff didn’t exist at all, we project that the US HNWI population would be set to swell by 443,000 individuals next year and HNWI wealth would increase by more than $1.6 trillion.

· Uncertainty created by the fiscal policy standoff is shaping wealth managers’ asset allocation strategies.

· Fixed income products recorded the strongest growth between 2007 and 2011, driven by a movement to safer asset classes. Looking ahead to 2016, alternatives are expected to be the top-performing asset class for HNWIs.

· As of 2011 there are just over 5.1 million millionaires (HNWIs) in the United States, only 165,360 fewer than in 2007, despite the financial crisis.

· From the end of 2008 to the end of 2011, the US has added more than 1.1 million HNWIs, an increase of 28.6%, as the HNW population rebounded from the financial crisis.

According to WealthInsight analyst, Christopher Rocks: “With signs that growth in the US economy is decelerating, HNWIs will be worried about the economic uncertainty being created by the so called ‘fiscal cliff’. At the moment there is intense speculation among wealth managers over what exact course US fiscal policy will take in the short-term, which could have significant repercussions for America’s wealthy population.”

Read more: What does Obama’s re-election mean for markets?

Summary: US ‘fiscal cliff’

Congress and the White House are locked in negotiations to strike a deal to weaken the impact of tax increases and spending cuts due to be implemented in January. December 31 is the deadline for action before scheduled fiscal tightening of over $600 billion – about 4% of U.S. GDP – automatically comes into play.

The issue has deeply divided American politics. The US deficit, above $1 trillion for each of the last four years, is a major source of concern; but so too is the lacklustre recovery in the world’s largest economy since the 2008 financial crisis. There is balance to be struck between setting the country on a sustainable fiscal path and engendering an environment of more robust near-term growth.

Indeed, while the US housing market has been recovering and global stocks have rallied in the second half of 2012, the IMF has predicted modest growth of just 2% for the US in 2013. But the Fund has also warned of the potential negative effects of the ‘fiscal cliff’; cautioning that the full brunt of policies contributing to tighter fiscal policy could push the US economy into recession, and possibly the global economy as well.

Uncertainty alone has hit global investment and stocks. If the US fails to avert the cliff, economic growth in the US for 2013 could be setback and high net worth wealth with it. The Congressional Budget Office, for example, believes real economic growth would contract at an annual rate of 1.3% for the first half of 2013 under the worst case scenario.

Given the harshness of the scenario, it is generally considered likely that a deal will be reached; either before the year-end deadline, or in January before the presidential inauguration. Neither party wants to be blamed for triggering an economic downturn. Moreover, the re-election of a Barack Obama has delivered greater political certainty compared with last year’s negotiations.

Read more: More millionaires under Obama

Investors peer past the cliff

Even if the ‘fiscal cliff’ is avoided though, this doesn’t mean the US economy will sidestep a slowdown. The nature of any deal is important; “kicking-the-can” would likely see markets remain volatile through the start of 2013. There also remains the possibility of a fiscal slope: a growth-sapping bargain which prompts a damaging degree of fiscal tightening. Even without the cliff, fiscal tightening close to 2% of GDP is conceivable, a level broadly considered a risk to economic recovery.

The Federal Reserve Chairman Ben Bernanke has also said that a strong plan on reducing long-term federal budget deficits without harming the recovery, a grand fiscal deal, could lead to a strong bounce in the US economy.

However, it is more likely that some fiscal uncertainty will hang over the economy for some time to come as longer-term budgetary challenges persist into 2013. As a result, assets like gold and prime property will be increasingly appealing to wealth managers. There is also the prospect of a market sell-off before year-end as wealth managers navigate changes in taxation, including the probable elapsing of the existing low level of capital gains tax.

WealthInsight analysis shows that fixed income products recorded the strongest growth between 2007 and 2011, driven by a movement to safer asset classes. Looking ahead to 2016, we forecast that alternatives will be the top-performing asset class for HNWIs.

Buy the WealthInsight United States 2012 Wealth Book here

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