Global Wealth Report?Financial assets immunized against Covid19, Updated Outlook 2021?Living on with a Covid19 hum & eurodollar xchange rate forecast

As Q3 is drawing to an end, I'm pleased to share with you the Allianz Global Wealth Report – in its 11th year already, which analyses in detail the global wealth development and the widening prosperity gap between rich and poor. Our updated global economic scenarios are another navigator for you, helping with planning and investment decisions. And last but not least, we present our methodology that separates short- and long-term factors affecting the price determination of the EUR/USD exchange rate.

Allianz Global Wealth Report 2020: Wealth Immunity

Our ‘Global Wealth Report’ analyses the asset and debt situation of households in almost 60 countries, you’ll find the full report here. The main results in a nutshell:

A bumper year: In 2019, central banks saved the day and gave stock markets around the globe strong tailwinds, bestowing households with the fastest growth in financial assets since the Great Financial Crisis (GFC): Gross financial assets jumped by +9.7% in 2019 and reached EUR192trn.

Crisis? What Crisis? Then, Covid-19 hit the world economy and sent it into the deepest recession in 100 years. But will this wipe out huge chunks of wealth? Our estimates suggest that private households have been able to recoup their losses of the first quarter, recording a slight +1.5% increase in global financial assets by the end of the second quarter of 2020 as bank deposits, fueled by generous public support schemes and precautionary savings, increased by a whopping +7.0% since the end of 2019. It’s very likely that private households’ financial assets could end 2020 in the black.

Up in the air: Not surprisingly, securities were the best performing asset class in 2019: Booming stock markets led to an increase of +13.7%, after a decline of -5.1% in 2018. Growth was never faster in the 21st century. The growth rates of the other two main asset classes were lower but still impressive: Insurance and pensions reached +8.1%, mainly reflecting the rise of underlying assets, and bank deposits increased by +6.7%. In fact, all asset classes clocked growth significantly above their long-term averages since the GFC.

To whom they have been given: The regional growth league table used to be dominated by Emerging Markets. Not so in 2019. The regions that saw the fastest growth in 2019 were by far the richest: North America and Oceania. In both regions, gross financial assets of households increased by a record +11.9%. As a consequence, for the third year in a row, Emerging Markets were not able to outgrow their much richer peers in the industrialized world. The catch-up process has stalled.

Debt is inching up: Worldwide household liabilities rose by +5.5% in 2019, a tad below the previous year's level of +5.7%, but also well above the long-term average annual growth rate of +3.9%. As debt grew slightly faster than GDP, the global debt ratio (liabilities as a % of GDP) inched up to 65%.

Trend reversal: The prosperity gap between rich and poor countries has widened again. In 2000, net financial assets per capita were 87 times higher on average in the industrialized countries than in the Emerging Markets; by 2016 this ratio had fallen to 19. Since then, it has risen again to 22 (2019). This reversal of the catching-up process is widespread: for the first time, the number of members of the global wealth middle class has fallen significantly: from just over 1 billion people in 2018 to just under 800 million people in 2019. This negative trend could be further exacerbated by Covid-19.

'A rich man’s world': The richest 10% worldwide – 520 million people in the countries in our scope with average net financial assets of EUR 240,000 – together owned roughly 84% of total net financial assets in 2019; among them, the richest 1% – with average net financial assets of above EUR 1.2 million – owned almost 44%. The development since the turn of the millennium is striking: While the share of the richest decile has fallen by seven percentage points, that of the richest percentile has increased by three percentage points. So the super-rich do indeed seem to be moving further and further away from the rest of society.

Global economic scenarios: Living on with the Covid-19 hum

Stop-and-go containment measures confirm a return to normal in 2022. After strong post-lockdown catch-up effects, we expect the recovery to slow in Q4 2020 and Q1 2021 as distancing measures tighten again and ongoing job shedding keeps spending and investment in check. Therefore we lower our GDP growth forecasts for 2021 to +4.6% (vs. +4.8% expected in June), following a contraction of -4.7% in 2020. Q2 data has already confirmed diverging recovery paths, with China and its Asian trade partners, Germany and Brazil outpacing the rest of Western Europe and the U.S. The sharpest trend reversals in activity should be visible starting in Q4 2020 in Europe (mainly Spain, France and the UK), the U.S. and in Emerging Markets such as Brazil and Mexico. In this context, the gradual phasing out of temporary policy measures designed to support companies will lead to a major trend reversal in business insolvencies, with a +31% increase expected by the end of 2021.

A dual recovery for trade, consumers and investors. First, despite a stronger-than-expected recovery in goods trade worldwide, the U.S. and Western Europe are trailing China, Emerging Asia and Eastern Europe’s export recovery. In 2020, we forecast a fall in global trade in goods and services by -13% (vs.-11% in 2009) in volume terms, leading to USD4trn of trade losses. In 2021, we forecast a +7% technical rebound but expect a return to pre-crisis levels only in 2023 as services continue to struggle and calls for de-globalization emerge. Meanwhile, a loss of purchasing power for the most fragile households will be hard to recover. The asymmetric exposure to job losses meant young, less qualified and part-time workers were hit the hardest, implying a K-shaped or “dual” recovery in consumer spending ahead.

Political risk could be back like a boomerang. Odds for a no-deal Brexit have risen to 45%, while the U.S. elections are paving the way for a new fiscal cliff and a judiciary dispute at the end of the year. In 2021, the tech war between the U.S. and China, tensions in the Mediterranean Sea and the U.S.-Russia dispute will remain top of mind. The risk of policy mistakes for Emerging Markets that loosened their fiscal discipline to fight the crisis will rise in 2022: anticipations of higher U.S. rates should materialize then and debt sustainability worries could trigger pressures on EM currencies.

Not the time to take risks. In the current market environment, it is important to consider that there is greater economic uncertainty now than at the beginning of the year, despite the current monetary and fiscal policy mix, as well as more geopolitical risks and tighter valuations. In this context, equity markets show a persistent detachment from fundamental determinants, making the recent rally hardly justifiable. Because of that we still expect the equity market to underperform in 2020 and to start a muted rally in 2021. When it comes to corporate credit, both investment grade and high-yield corporate spreads look too tight. As in equities, corporate credit markets remain detached from fundamentals on the back of the central banks’ perpetual put option. Hence, we expect corporate spreads to converge towards higher values due to higher than expected market volatility and increasing default rates. Lastly, with the short-end of most developed countries’ sovereign yield curves anchored by their respective central banks, we expect a timid curve steepening towards the end of 2020 and 2021. This gradual increase in term premium will occur on the back of higher inflation expectations and a halt in the recent decline of real yields. On the other hand, long-term Emerging Market sovereign spreads look overbought. The combination of this extreme bullish positioning and the current market fragility is a perfect combination for EM assets to become a victim of a second “risk-off” rotation in the wake of a second risky-assets market correction.

Fiscal and monetary policy: The devil is in the details. EU member states agreed on issuing common debt to boost the recovery in a historical move. Yet the different natures and spending calendars of fiscal policies will matter: countries focusing on (short-term) demand (Germany, U.S., China etc.) could see a faster recovery than those betting on supply (France). Some countries still need to do more (Spain, Italy, the UK). In the immediate crisis aftermath, inflation is likely to remain muted despite these policy impulses; we see it moderately and temporarily overshooting in the U.S. starting in 2022. On the monetary policy side, we expect an acceleration of the U.S. Fed’s securities purchases in H1 2021, with a tapering of its QE program to only start from mid-2022 and a first rate hike in Q3 2023. The ECB should announce an additional EUR 500bn in Quantitative Easing in December 2020.

Scarring effects? Covid-19 has changed the rules of the game for economic growth and capital markets. First, the fight for regional primacy will lead to a regular “weaponization” of technology, trade, currencies and payment systems. Second, the balance between the state and markets will change, to the disadvantage of the latter. And as the state gets more and more entangled in the private sector, market dynamics for innovation will get weaker while the number of zombie companies rises. Private players in social security – such as life insurers – might be pushed against the wall. The growing role of the state also has ramifications for monetary policy. High (unsustainable) debt levels will force central banks to backstop sovereign and corporate bond markets to ensure favorable refinancing conditions. In the end, these ultra-expansionary monetary policies may strip markets of their ability to price and allocate resources appropriately and encourage excessive risk-taking by both debtors and investors. However, every cloud has a silver lining: Covid-19 has showed how quickly change is possible; it is a welcome break-up of encrusted structures and a boost to digitalization. The way we work has changed for good. Future work will see more remote working and flexible team structures but less business trips. Finally, it has also raised society’s risk awareness, including for low-probability, high impact tail risks. The upshot: More demand for and better pricing of risk cover. This should be a boon for insurers – if they are able to offer comprehensive and simple solutions.

Please find the report and the slide deck here.

Eurodollar – Lost in translation?

After its peak on 20 March 2020, the USD has depreciated 10% against the EUR (1.174 as of 21 September 2020), going back to levels last seen in mid-2018. This rapid depreciation has raised many questions about the future of the dollar. Though forecasting exchange rates is a form of Holy Grail for forecasters, we decided to stick our neck out and present our methodology that separates short- and long-term factors affecting the price determination of the EUR/USD exchange rate. You’ll find our full results here.

Due to the recent anchoring of both USD and EUR short-end of the curves, by their respective central banks, Forward EUR/USD rates contain no relevant information about the future path of the EUR/USD exchange rate.

Our modeling approach based on the U.S. balance of payments hints at a mild appreciation of the USD vs. the EUR in the mid- to long-term (converging towards parity in the long-run). Nevertheless, this methodology does not reveal much information about short-term developments.

Our monetary model suggests that if current economic and financial dynamics do not suddenly change, the dollar is set to depreciate versus the EUR by up to 5% (~1.25) within the next 12 months. Yet, it also suggests that if the U.S. would start reverting to pre-Covid-19 dynamics, the EUR/USD would start a slow but steady climb towards parity.

Overall, by combining both balance of payments and monetary approaches, and under the assumptions that the Covid-19 economic shock is set to fade away in 2021-2022 and that U.S. funding dynamics are set to slowly converge to pre-Covid-19 trends, we conclude that the USD can depreciate by as much as 5% (~1.25) in the next 12 months. Thereafter, it could resume its upward trajectory, slowly converging at a 2 to 3% annual rate towards parity.