The importance of stocks for wealth

As the prosperity gap widens between rich and poor countries, answers are being sought about how American households continue to hold nearly half of the world’s total private financial assets.

-Forced savings helps increase global financial assets
-Wealth in the United States is increasingly decoupled from the rest of the world
-China leads in growth rates for wealthy citizens
-The 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 it for the first time helped propel global financial assets beyond 300% of global GDP.

There was almost tripling of inflows on bank deposits according to a recent report on global wealth from German financial services company Allianz. These deposits accounted for half or more of new savings in all markets considered except Australia, where pensions have had only a narrow grip.

The rise in bank deposits even left behind the growth of securities, which accelerated thanks to a good performance of equities (a subset of securities).

At the same time, in emerging markets, financial assets increased by 13.1% in 2020 against 8.9% for industrialized countries. For the same period, Asia (excluding Japan) achieved its highest growth rates of this millennium.

From a longer term perspective, and taking into account inflation, Asia (excluding Japan) is the undisputed champion of growth. Financial assets per capita have more than quintupled on average since 2000, twice as fast as in the other two emerging regions, Eastern Europe and Latin America.

The Global Wealth Report also found that richer countries have been hit hardest by the pandemic, although in the medium to long term covid-19 is expected to hit emerging markets harder.

Despite the short-term impact on rich countries, wealth in the The United States is increasingly decoupling from the rest of the world. More people can see themselves as upper class of global wealth again, thanks to a sharp increase in net financial assets.

More remarkably, North American households continue to hold nearly half of the world’s total private financial assets. This share has remained stable over the past decade. To take a step back, the per capita increase in average financial assets in the United States in 2020 alone roughly matches the total amount of financial assets per capita in Greece.

As we examine the ways the pandemic may have changed the outlook for certain asset classes, individuals, and countries, let’s first take a look at why the United States is doing so well.

Why did the United States prosper?

It seems Portfolio construction / savings behavior is key to rising US wealth, notes Allianz.

In the United States, savers hold just under 55% of their financial assets in the form of securities, mainly stocks, and have therefore benefited greatly in recent years from the stock market boom.

In a very different portfolio approach, savers in Western Europe and Japan only hold around 28% and 16% of securities.

Over the past five years, rising asset values ​​have accounted for 70% of total asset growth in the United States. For Western Europe, this ratio is 46% and for Germany a very modest 11% and Japan 6%.

The rise of the wealthy class in China

The world class of the rich makes up about 12% of the population, or 600 million people, in the countries studied by Allianz.

This is the end result of 1.6% growth per year since 2000, a growth rate twice that of the overall population. Growth is almost entirely due to China, which has now caught up with Western Europe. Each has around 140 million wealthy citizens.

Other regions such as Eastern Europe and the rest of Asia have also experienced strong growth over the past 20 years, albeit at a much lower level, according to the Global Wealth Report. .

In 2020, Western Europe, North America and Japan’s share of the rich world class fell to 67% from 93%.

The prosperity gap between rich and poor nations is widening

As mentioned above, emerging markets could be hit harder in the medium to long term by the aftermath of covid-19.

Compared to industrialized countries, the vaccination campaign in the poorest countries is proceeding very slowly and will likely continue to hamper economic development over the next two years. In addition, the rapid increase in public debt could potentially place a disproportionate burden on the poorest 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 accelerated the end of hyper-globalization. Even before covid-19, increasing trade disputes and growing protectionism caused a slowdown in international trade. From now on, trade will be further affected by the move towards sustainability and a shortening of supply chains, which will lead to further offshoring of production.

At the same time, covid-19 provided a tailwind for scanning. Big data, artificial intelligence and connected automation will definitely change the world of work and likely reduce the comparative advantage of a relatively cheap workforce in emerging markets.

Elsewhere, it is expected by Allianz that decarbonization will lead to an investment boom, especially in rich countries. At the same time, consumer demand in these countries will experience a structural transformation that will impact the economic model of many emerging markets, whether they are suppliers of raw materials or producers of goods.

Debt

Debt in the United States accounted for 81.5% of output in 2020, up from 76.6% in 2019. However, the rise was not so much due to an increase in liabilities, but rather because of the sharp economic contraction. from 2020.

To date, debt default is not seen as a problem, says Allianz. Nonetheless, when pandemic protections expire, household and government debt could potentially become a risk factor.

Meanwhile, Australia’s debt ratio is the second highest in the world, reaching an all-time high of 129.3% in 2020. This reflects the burden that construction and housing prices have placed on household balance sheets, according to the World Wealth Report.

By the way, in the EU, even before the pandemic, 22% of the population was estimated to be at risk of debt distress. According to Allianz, it could get worse if the increasingly popular BNPL services are mismanaged.

Outlook

In the absence of major market corrections, 2021 is set to prove to be another good year for private household financial assets, according to Allianz, with overall financial asset growth of around 7% globally, up from 9.7 % in 2020.

As interest in investing in capital markets such as stocks or investment funds remains high, 9-10% growth looks likely in 2021, roughly at 2020 levels.

In contrast, the investment trend in insurance and pension funds is expected to be much more moderate. Here, any slight rise in interest rates would likely result in losses for fixed income securities.

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