New research from Merrill Lynch and Capgemini finds that, spurred by strong GDP and market capitalization growth, the Asia-Pacific region’s high-net worth population grew to 2.6 million last year, an increase of 8.6%.

The firms say that the Asia-Pacific area now accounts for 27.1% of the global HNWI population, with a combined wealth of US$8.4 trillion in 2006, an increase of 10.5% over 2005. HNWI wealth was concentrated in Japan and China, which accounted for 43.7% and 20.6%, respectively, of the region’s total wealth.

Asia-Pacific was home to five of the 10 fastest growing markets for HNWIs, including Singapore, India and Indonesia, where the HNWI populations grew by 21.2%, 20.5% and 16.0%, respectively, compared with the global HNWI expansion of 8.3%. Korea and Hong Kong were also in the top 10 fastest growing markets globally.

“Although the vast majority of Asia-Pacific’s HNWIs hold between US$1 million and US$5 million in net financial assets, we are seeing a sharp rise in the number of Ultra-HNW individuals – people with more than US$30 million in assets,” says Gregory Smith, vice president wealth management, Capgemini Australia. “This is particularly evident in China, where that country’s phenomenal economic growth is reflected in a high concentration of Ultra-HNWIs. According to our findings, more than 28% of the 17,500 Ultra-HNWIs in the region are in China,” says Dirk Chanmueller, vice president, Capgemini China.

“Overall, it’s a story of growth, growth and more growth for the HNWI marketplaces throughout the region,” says Rahul Malhotra, managing director, Head of Asia Pacific, Merrill Lynch Global Wealth Management. “While HNWI investment behaviors differ from market to market, the underlying drivers of wealth remain strong overall and we expect the region will continue to outpace the global rate of growth in HNWI wealth.”

The key drivers of wealth in Asia-Pacific in 2006 were strong growth in real GDP and stock market capitalizations. The region showed among the highest GDP growth rates in the world. China and India drove the region with 10.5% and 8.8% real GDP growth, respectively. Additionally, savings rates, as a percentage of GDP, were higher in Asia-Pacific than most developed markets. China, Singapore and Hong Kong all had domestic savings rates in excess of 40%.

China, Indonesia, India and Hong Kong benchmark stock indices outperformed most mature capital markets, as well as their peer markets in the region with returns over 30%.

The firm also reported that non-traditional investment products are gaining in popularity as Asian investors seek better domestic returns and foreign institutions seek involvement in the high-growth region. For example, real estate investment in Asia-Pacific has grown due to the strong performance of commercial property and REITs.

Within the region, asset allocation differed significantly from market to market. Australian HNWIs, for example, allocated 37% of their assets to equities, the highest level in the region. Investors in China and Indonesia also had relatively high equity allocations. Investors in South Korea, on the other hand, allocated the largest percentage of their portfolios to real estate.

Asia-Pacific HNWIs are increasingly looking at internationalizing their investment portfolios and, over the longer term, re-balancing their asset allocations in favor of alternative investments, equities and fixed income, they noted. In addition, Asia-Pacific HNWIs are increasing their international exposure although still maintain a very regional portfolio focus. Slightly more than half of Asia-Pacific HNWIs’ assets were invested within the region and slightly more than a quarter of their holdings were allocated to North America.

The primary sources of wealth for China and Australia, for example, are business and stock options, whereas inheritance and income are the main wealth sources for Japan’s HNWIs.

“The intensifying competition for HNWI clients, the strong growth in HNWI wealth and numbers and the varying individual product maturity across HNWI markets, pose significant challenges and complexities to the financial advisory firms servicing these markets,” says Smith. “Already we are seeing sharper pricing, product commoditization and a shortage of qualified advisers across the region.”