Allianz Global wealth report: The end of complacency

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As the current year enters the final two months, the investment management firm Allianz Global reflects on the year just past in hopes of making better sense of the ebb and flow of events this year and draw a better path for the coming year.

It said 2017 was an exceptional year. Despite growing political tensions, it was an almost perfect year for investors. The economic recovery following the financial crisis culminated in a synchronous upturn around the globe and financial markets performed strongly, particularly equity markets. As a result, financial assets of households rose significantly by 7.7 percent.

While investors rediscovered the capital markets, bank deposits fell out of favor with households around the globe.

Global gross financial assets increased to EUR 168 trillion.

“Last year was a very good year for savers,” said Michael Heise, chief economist of Allianz.

“But it was as good as it gets, the post-crisis era is over for good. Gone are the times when an extremely expansive monetary policy provided for a continuous and steady upward trend on financial markets. The signs are already worrying: Rising interest rates, trade conflicts, and increasingly populistic politics cause tensions and turbulences. The first month of this year gave already a bitter foretaste.”

Philippines: Consumer loans
reached new record high
In 2017, consumer loans increased by 17.2 percent. However, only 14 percent of the loans were borrowed from the formal sector, indicating a huge backlog demand in the coverage of financial services. According to the latest World Bank survey, only 32 percent of the population aged 15 and older had an account at a financial institution. However, 20.6 percent of indebted households have negative to zero financial margins and 11.7 percent have financial margins of less than EUR 170, being vulnerable to tighter financial conditions.

Industrialized nations
catch up — the US overtakes China
The years following the crisis were mainly characterized by relatively weak asset growth in industrialized compared to emerging countries. This also changed in 2017. The acceleration in growth was due solely to development in industrialized nations: while growth in these countries increased by more than one percentage point to 6.5 percent, in emerging countries it slackened by three percentage points to 12.9 percent. The growth differential between these two groups of countries was at its lowest level since 2005, at 6.5 percentage points.

The average figure for the past decade was twice as high, at 13 percentage points. This contrasting development when it comes to growth in financial assets was largely due to the respective heavyweights, China (where growth slowed from 18.3 percent to 14 percent) and the US (where growth accelerated from 5.8 percent to 8.5 percent). In Asia (ex Japan) growth eased from 14.7 percent in 2016 to 12.2 percent in 2017. The US has thus overtaken China again in terms of absolute growth. In 2017, the US accounted for around 44 percent of global growth in gross financial assets of households, while China accounted for only about 25 percent. This ratio has averaged 26 percent vs. 35 percent over the last three years — but with China coming out on top.

Investment in securities
makes a comeback
There was a noticeable shift in investment behavior in 2017. After savers had largely ignored shares and investment funds in the post-crisis years, 2017 saw significant inflows into this asset class. Its share last year reached almost a fifth of fresh funds, even more than in the years preceding the crisis. In the context of booming stock markets, this meant that securities enjoyed by far the strongest growth of all asset classes in 2017, increasing by 12.2 percent in total and representing over 42 percent of all savings at the end of 2017. This is followed in second place by receivables from insurance companies and pensions, which account for 29 percent of the asset portfolio and grew by 5.2 percent last year.

Wealth distribution has improved in many countries since the turn of the millennium, but in many others it has deteriorated.

While investors rediscovered the capital markets, bank deposits fell out of favor with households around the globe. Only 42 percent of new investments went into banks, compared with 63 percent the year before. In absolute figures, this meant a drop of over EUR 390 billion. As a consequence, growth in deposits declined by two percentage points to 4.3 percent (share of asset portfolio almost 27 percent). “Savers finally recognized the signs of the times,” said Kathrin Brandmeir, co-author of the report. “The withdrawal of love for bank deposits, particularly in the “old” industrialized countries, came not a second too early.

Because inflation staged a return. Price increases in these countries tripled in 2017 — albeit still on low level. As a result, losses in purchasing power of bank deposits shot up, too: They are estimated to add up to EUR 400 billion in 2017 alone.”

Debt growth
accelerates further
Worldwide household liabilities rose by 6 percent in 2017. The growth rate was thus slightly above the previous year’s level of 5.5 percent. In Asia (ex Japan), liability growth moved sideward, however on a high level, declining from 16.5 percent to 15.8 percent in 2017, due to the high credit demand in the region’s emerging markets. Thanks to strong economic growth, however, the global debt ratio (liabilities as a percentage of GDP) increased only minimally to 64.3 percent (Asia ex Japan: 49.2 percent). These global averages naturally mask huge differences. In some countries debt levels and dynamics have reached critical figures in the last few years. “In the majority of analyzed countries, private debt dynamics are not worrisome,” commented Michaela Grimm, co-author of the report. “However, in particular in Asia there are some countries — Thailand, Malaysia, South Korea and China for example — in which supervisory agencies should monitor the development very closely. In these countries, similarities to the credit excesses before the financial crisis can not be overlooked.” Despite the strong growth in liabilities, net financial assets i.e. the difference between gross financial assets and debt reached a new global record high of EUR 128.5 trillion at the close of 2017. This represents an increase of 8.3 percent compared with the previous year.

More participation thanks to globalization
The last two decades of rapid globalization have given rise to a new global wealth middle class, which included almost 1.1 billion people at the end of 2017. Fewer than half a billion people belonged to this group at the turn of the millennium, with just under half of them coming from Western Europe, North America or Japan. Today, these countries account for only a quarter of the global wealth middle class. In contrast, China’s share has soared from just under 30 percent to over 50 percent in this period. The figures accompanying this success story are impressive: around 500 million Chinese people have moved up to join the ranks of the global wealth middle class since 2000, and over 100 million more can now even consider themselves part of the global wealth upper class. Thus today 62 percent of the global middle wealth class and 42 percent of the high wealth class are citizens of an Asian country.

More inequality in
industrialized countries
The development of inequality in the national context, however, shows a very heterogeneous picture. Wealth distribution has improved in many countries since the turn of the millennium, but in many others it has deteriorated. The latter group includes a large number of industrialized countries, from the US to the euro crisis countries, and even Germany and Japan. The perception that the “old” industrialized nations in particular have been suffering in recent decades from a growing gulf between rich and poor therefore seems to match the reality in many cases.

The US has thus overtaken China again in terms of absolute growth.

A new indicator for the national distribution of wealth
To obtain a nuanced picture of national distribution in an international context, we have introduced a new indicator in this report, the Allianz wealth equity indicator. Some of the results are surprising. Along with the “usual suspects” of the US, South Africa, Indonesia and the UK, countries where the distribution of wealth is relatively strongly distorted also include Denmark, Sweden and Germany. In Scandinavia this may be primarily due to high debt levels among large parts of the population; in Germany, the country’s delayed reunification and the general shortage of capital-funded pension schemes play a crucial part. On the other hand, those countries where wealth distribution is relatively balanced include many eastern and western European countries, some of which are euro crisis countries such as Italy, Spain and Greece. Even if the last few years of crisis and austerity may have led to greater inequality in the last two countries in particular, they still have a relatively solid base to fall back on, as assets have traditionally been very widely distributed — not least when it comes to real estate assets. “Our new wealth equity indicator shows clearly that we should be wary of drawing hasty or generalized conclusions,” said Michael Heise.

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