International | Oct 14 2021
As the prosperity gap widens between rich and poor nations, answers are sought over how US households continue to hold almost half of the world's total private financial assets.
-Forced savings help lift global financial assets
-Wealth in the US is increasingly decoupling from the rest of the world
-China leads in growth rates of high-wealth citizens
-Prosperity gap widens between rich and poor nations
-Australia has the second highest debt ratio in the world
By Mark Woodruff
Forced savings rose to prominence in 2020, as they helped propel global financial assets beyond 300% of global GDP for the first time.
There was a near tripling of inflows into bank deposits according to a recent global wealth report from German financial services company Allianz. These deposits accounted for half or more of fresh savings in all markets considered, except for Australia, where superannuation narrowly held sway.
The rise in bank deposits even left behind the growth in securities, which climbed thanks to a robust performance of equities (a subset of securities).
Meanwhile, in Emerging Markets, financial assets grew by 13.1% in 2020 compared to 8.9% for industrialised countries. For the same period, Asia (ex Japan) achieved its highest growth rates this millennium.
From a longer-term perspective, and taking inflation into account, Asia (ex Japan) is the undisputed growth champion. Per capita financial assets have increased more than fivefold on average since 2000, which is twice as fast as in the two other emerging regions, Eastern Europe and Latin America.
The global wealth report also revealed that richer countries were more affected by the pandemic, though in the medium and long term, it’s expected covid-19 will likely hit emerging markets harder.
Despite the short-term hit to richer countries, wealth in the US is increasingly decoupling from the rest of the world. More people there can again count themselves as members of the global wealth upper class, thanks to a strong increase in net financial assets.
More remarkably, households in North America continue to hold almost half of the world's total private financial assets. This share has remained stable over the past decade. To gain perspective, the per capita increase in average financial assets for the US in 2020 alone is roughly the amount of total financial assets per capita in Greece.
In looking at the ways in which the pandemic may have changed the outlook for some assets classes, individuals and countries, let’s first examine why the US is faring so well.
Why has the US has prospered?
It seems portfolio construction/savings behaviour is the key to the rise in US wealth, notes Allianz.
In the US, savers hold just under 55% of their financial assets in the form of securities, mainly equities, and have therefore benefited greatly over recent years from the stock market boom.
In a markedly different portfolio approach, Western European and Japanese savers only hold around 28%, and 16% in securities.
Over the past five years, the increase in value of asset holdings accounted for 70% of total asset growth in the US. For Western Europe, this ratio is 46% and for Germany a very modest 11%, and Japan 6%.
The rise in China’s high-wealth class
The global high-wealth class accounts for around 12% of the population, or 600m people, in the countries Allianz studied.
This is the end result of 1.6% growth per annum since the year 2000, a rate of growth twice that of the overall population. The growth is almost solely due to China, which has now caught up with Western Europe. Each has around 140m high-wealth citizens.
Other regions such as Eastern Europe and the rest of Asia have also seen strong growth over the past 20 years, albeit at a much lower level, according to the global wealth report.
In 2020, the share of Western Europe, North America and Japan in the global high wealth class has fallen to 67% from 93%.
Prosperity gap between rich and poor nations to widen
As referred to previously, emerging markets may be hit harder in the medium to longer term by the after-effects of covid-19.
Compared with industrialised countries, the vaccination campaign in poorer countries is proceeding very slowly and will likely continue to hold back economic development over the next two years. Moreover, fast-rising public debt could potentially place a disproportionate burden on the poorer countries, notes Allianz.
There are also global trends to consider which, while not triggered by covid-19, have been given an additional boost by the pandemic.
For example, the pandemic has sped up the demise of hyper-globalisation. Even before covid-19, increasing trade disputes and growing protectionism were causing a slowdown in international trade. Now, trade will be further impacted by the shift towards sustainability, and a shortening of supply chains, which will lead to more on- or near-shoring of production.
At the same time, covid-19 has provided a tailwind for digitalisation. Big Data, artificial intelligence and connected automation will permanently change the world of work, and likely lessen the comparative advantage of relatively cheap labour in emerging markets.
Elsewhere, it’s anticipated by Allianz that decarbonisation will lead to an investment boom, especially in the richer countries. At the same time, consumer demand in these countries will undergo a structural transformation which will have an impact upon the economic model of many emerging markets, whether they are suppliers of raw materials or producers of goods.
Debt
Debt in the US represented 81.5% of output in 2020, compared to 76.6% in 2019. However, the rise was not so much because of an increase in liabilities, but rather because of the sharp economic contraction of 2020.
As of today, debt delinquency is not considered a problem, believes Allianz. Nonetheless, when pandemic protections expire, both household and government debt could potentially become a risk factor.
Meanwhile in Australia, the debt ratio is the second highest worldwide, and reached a historical high of 129.3% in 2020. This reflects the burden that construction and housing prices have put on household balance sheets, according to the global wealth report.
As an aside, in the EU, even before the pandemic, 22% of the population was estimated to be at risk of over-indebtedness. It’s the view of Allianz this could worsen if the increasingly popular BNPL services are mismanaged.
Outlook
Assuming no major stock market corrections, 2021 should turn out to be another good year for the financial assets of private households, according to Allianz, with overall growth in financial assets globally of around 7%, compared to 9.7% in 2020.
As interest in capital market investments such as equities or investment funds remains high, 9-10% growth seems likely in 2021, roughly on a par with 2020.
In contrast, the trend for investments in insurance and pension funds is likely to be much more subdued. Here, any slight rise in interest rates would likely result in losses for fixed-income securities.
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