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Global savings in the shadow of the crisis

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Holzhausen
These are challenging times for savers. Faced with a looming “pension gap” owing to the ongoing demographic change, private households need to accumulate higher level of savings to build a sufficient nest-egg for the future. But financial markets are not being kind to them, as the new “Allianz Global Wealth Report” shows: Last year, financial assets barely increased, with net per capita financial assets growing worldwide by a measly 0.6%. This disappointing development is due primarily to low growth in gross financial assets: although the EUR 100 trillion mark was surpassed in 2011 – also thanks to the weak euro – pushing the global financial assets of private households up to EUR 103.3 trillion in total, the growth rate came in at only 1.6% and in per capita terms at a mere 0.8%. Uncertainty, low interest rates and the euro crisis have left their mark on asset development. Savers are bearing the brunt of the fact that no real progress has yet been made as far as reorganizing the financial markets and solving the crisis in the eurozone are concerned.Holzhausen

Looking back, it also becomes clear that savers have been faced with a hostile savings envi-ronment for some time now: since 2000, gross per capita financial assets have been growing at an average rate of 3.1% a year; this is more or less identical to the average rate of inflation during the same period. In other words: savers worldwide have not been able to achieve any real asset growth over the past eleven years. Sobering news.

On the other hand, savers have been showing a more disciplined approach to debt since the financial crisis of 2007/08. The global debt mountain once again increased only moderately, by 2.2%, in 2011, much slower than the growth in nominal economic output. As a result, the global debt ratio (liabilities as a percentage of global GDP) slid by 2½ percentage points last year alone, to less than 67%. In the years prior to the crisis, global debt growth was often above the 8%-mark, with the debt ratio peaking at almost 72%.

Over the entire period starting in 2000, however, debt growth (averaging 5.5% per year) has clearly outstripped the growth in the assets of private households (4% per year). This is why the average growth in net per capita financial assets came in at only 2.5% a year. What is more: at EUR 14,880, the 2011 figure was still down slightly on the historical high recorded in 2007 in absolute terms. Although four years have passed since the global market and eco-nomic slump, the consequences on personal financial assets have yet to be digested in full.

In addition to the greater debt discipline, global asset development in the post-Lehman era is characterized by another phenomenon: the ongoing desire to seek refuge in secure invest-ments, a trend that is primarily benefiting the banks themselves – irrespective of the banking crisis. Over the last four years, bank deposits in every region of the world proved to be the fastest-growing asset class. Last year alone, savers worldwide ramped up their bank deposits by more than 6%, or around EUR 2 trillion. This means that the proportion of the asset portfolio parked in bank deposits has increased by 5½ percentage points since 2007 to 32.8%. At the same time, the proportion of securities has dropped by 6½ percentage points to 34.6%. However, this tendency to “flee” to (supposedly) low-risk investments, such as bank deposits, is counterproductive. The negative consequences of low interest rates become all the more potent. And with savers shying away from long-term investments that offer the sort of returns they need, this means that they have to save even harder in order to create a sufficiently comfortable financial cushion. A responsible approach to provision ultimately in-volves a certain degree of risk-taking.

But not all is gloom. Global figures do, of course, mask very varied developments at regional and national level. Broadly speaking, the world can be split in two when it comes to both asset levels and momentum. On the one hand, we have the richer countries in North America, western Europe, Japan and Oceania whose growth has been anemic in the past and whose weight on the global development is huge. Since 2000, net per capita financial assets in these countries have only been growing at annual rates of between 1.2% (Japan) and 2.4% (Oceania). This is particularly worrying from a European perspective: if we look at asset growth and the annual growth rate of 1.3%, western Europe is already starting to resemble Japan. And the rich regions of the world have yet another negative development in common: net per capita financial assets have contracted since the Lehman crisis, although in western Europe this is solely attributable to the decline seen last year. The substantial asset losses in those European countries that have been hit by crisis are the main factor weighing on asset development in the region as a whole.

By contrast, growth in the up-and-coming economies of Latin America, Asia and eastern Eu-rope has been far from anemic. Savers in these regions have been consistently reporting stellar asset growth rates since the turn of the millennium, with net per capita financial assets growing at annual rates running into the double digits on average. Although the financial crisis of 2007/08 also prompted a marked slowdown in these regions, the annual growth rates remain robust at between 7% and 10%.

Even more enlightening is the analysis of the micro distribution of assets. It reveals funda-mental and encouraging shifts on the global wealth map. At the end of 2011, around 720 million people across the globe belonged to the wealth middle class, which the “Allianz Global Wealth Report” defines as net per capita financial assets between EUR 4,500 and EUR 26,800. This figure has more than doubled since 2000. This group accounted for 15% of the total population of the countries analyzed. This growth is being fed largely from the world’s poorest countries (LWCs): at 355 million, they now constitute the largest group within the global wealth middle class; this figure has increased almost tenfold since 2000. In a global comparison, more and more people are managing to participate in general prosperity. And these people no longer come from the typical prosperous regions, but from up-and-coming economies, particularly in Asia. This will fundamentally change the face of the global finan-cial, asset and goods markets over the next few years.

 
 
 
 

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Wall Street Week Ahead: Investors weigh new stock leadership as broader market wobbles

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Wall Street Week Ahead: Investors weigh new stock leadership as broader market wobbles 1

By Lewis Krauskopf

NEW YORK (Reuters) – A shakeup in stocks accelerated by the past week’s surge in Treasury yields has investors weighing how far a recent leadership rotation in the U.S. equity market can run, and its implications for the broader S&P 500 index.

Moves this week further spurred a shift that has seen months-long outperformance for energy, financial and other shares expected to benefit from an economic recovery, while a climb in Treasury yields weighed on the technology stocks that have led markets higher for years.

The two-track market left the benchmark S&P 500 down for the week, and sparked questions about whether it could sustain gains going forward if the tech and growth stocks that account for the biggest weights in the index struggle.

So far this year, the S&P 500, which gives more influence to stocks with larger market values, is up 1.5%, while a version of the index that weights stocks equally is up 5%.

“That just tells us the gains are less narrow, more companies are participating, and I think that’s healthy,” said James Ragan, director of wealth management research at D.A. Davidson.

The focus on market leadership comes as investors are weighing whether the S&P 500 is due for a significant pullback after a 70% run since March, with the rise in long-dormant yields the latest sign of trouble for equities as it means bonds are more serious investment competition. The yield on the 10-year U.S. Treasury note this week jumped to a one-year peak of 1.6% before pulling back.

Economic improvement will be in focus in the coming weeks, including the monthly U.S. jobs report due next Friday, as will the country’s ability to ensure widespread coronavirus vaccinations, especially as new variants emerge.

Tech and momentum stocks helped drive returns in 2020 “when everyone was locked down and all they had was their computer,” said Jack Ablin, chief investment officer at Cresset Capital Management. “Now it seems with the vaccines, the stimulus and the prospect of reopening that we are looking out toward a recovery phase.”

The shift in the market this week is building on one that was fueled in early November, when Pfizer’s breakthrough COVID-19 vaccine news generated broad bets on an economic rebound in 2021.

Among the moves since that point: the S&P 500 financial and energy sectors are up 29% and 65%, respectively, against a nearly 9% rise for the benchmark index and 7% rise for the tech sector. The Russell 1000 value index has gained 16.5% against a 4.3% climb for its growth counterpart, while the smallcap Russell 2000 is up 34%.

“You definitely are seeing the reopening trade that has pretty much come alive here,” said Gary Bradshaw, portfolio manager of Hodges Capital Management.

Despite the gains, there remains “plenty of room for the reflation trade to run from a valuation perspective,” Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, said in a report this week. RBC is “overweight” the financials, materials and energy sectors.

Rising rates tend to be favorable for more cyclical sectors, David Lefkowitz, head of Americas equities at UBS Global Wealth Management, said in a note, with financials, energy, industrials and materials showing the strongest positive correlations among sectors with 10-year Treasury yields.

Still, how long the market’s reopening trade lasts remains to be seen. Investors may be reluctant to stray from tech and growth stocks, especially with many of the companies expected to put up strong profits for years.

Any setbacks with the economy or with efforts to quell the coronavirus could revive the stay-at-home stocks that thrived for most of 2020.

And with a GameStop-fueled retail-trading frenzy taking hold this year, banks and other stocks in the reopening trade may fail to draw the same attention from amateur investors as stocks such as Tesla, said Rick Meckler, partner at Cherry Lane Investments.

“There isn’t the pizzazz to those stocks,” Meckler said. “There rarely is a potential for stocks to make the kind of moves that big tech growth stocks have made.”

(Reporting by Lewis Krauskopf; editing by Richard Pullin)

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Exclusive: European officials urge World Bank to exclude fossil-fuel investments

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Exclusive: European officials urge World Bank to exclude fossil-fuel investments 2

By Kate Abnett and Andrea Shalal

WASHINGTON (Reuters) – Senior officials from Europe have urged the World Bank’s management to expand its climate change strategy to exclude investments in oil- and coal-related projects around the world, and gradually phase out investment in natural gas projects, according to three sources familiar with the matter.

In the six-page letter dated Wednesday, World Bank executive directors representing major European shareholder countries and Canada, welcomed moves by the Bank to ensure its lending supports efforts to reduce carbon emissions.

But they urged the Bank – the biggest provider of climate finance to the developing world – to go even further.

“We … think the Bank should now go further and also exclude all coal- and oil-related investments, and further outline a policy on gradually phasing out gas power generation to only invest in gas in exceptional circumstances,” the European officials wrote in the letter, excerpts of which were seen by Reuters.

The officials took note of the World Bank’s $620 million investment in a multibillion-dollar liquified natural gas project in Mozambique approved by the Bank’s board in January, but did not call for its cancellation, one of the sources said.

The World Bank confirmed receipt of the letter but did not disclose all its contents. It noted that the World Bank and its sister organizations had provided $83 billion for climate action over the past five years.

“Many of the initiatives called for in the letter from our shareholders are already planned or in discussion for our draft Climate Change Action Plan for 2021-2025, which management is working to finalize in the coming month,” the Bank told Reuters in an emailed statement.

The Bank’s first climate action plan began in fiscal year 2016.

The United States, the largest shareholder in the World Bank, this month rejoined the 2015 Paris climate accord, and has vowed to move multilateral institutions and U.S. public lending institutions toward “climate-aligned investments and away from high-carbon investments.”

World Bank President David Malpass told finance officials from the Group of 20 economies on Friday that the Bank would make record investments in climate change mitigation and adaptation for a second consecutive year in 2021.

“Inequality, poverty, and climate change will be the defining issues of our age,” Malpass told the officials. “It is time to think big and act big in finding solutions,”

He said it was also launching new reviews to integrate climate into all its country diagnostics and strategies, a step initiated before the letter from the European officials, said one of the sources.

(Reporting by Andrea Shalal in Washington and Kate Abnett in Brussels; Additional reporting by Valerie Volcovici in Washington; Editing by Matthew Lewis)

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GameStop rally fizzles; shares still register 151% weekly gain

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GameStop rally fizzles; shares still register 151% weekly gain 3

By Aaron Saldanha and David Randall

(Reuters) – GameStop Corp closed 6% lower on Friday as an early rally fizzled but the stock finished the week 151% higher in a renewed surge that left analysts puzzled.

The video game retailer’s shares closed at $101.74 after retreating from a session high of $142.90. The weekly rocket ride higher came despite a broader market selloff that sent the benchmark S&P 500 <.SPX> down 2.5% over the same time.

Analysts have struggled to find a clear explanation, and some were skeptical the rally would have legs.

“You might be able to make some quick trading money and it could be a lot of money, but in the end, it’s the greater fool theory,” said Eric Diton, president and managing director at The Wealth Alliance in New York. The theory refers to buying stocks that are over-valued, anticipating a “greater fool” will buy them later at a higher price.

Analysts mostly ruled out a short squeeze like the one that fueled GameStop’s rally in January, when individual investors using Robinhood and other apps punished hedge funds that had bet against the stock, forcing them to unwind short positions. Many GameStop buyers took their cues from online investment forums on Reddit and elsewhere.

Short interest accounted for 28.4% of the float on Thursday, compared with a peak of 142% in early January, according to S3 Partners.

Options market activity in GameStop, which has returned to the top of the list in a social media-driven retail trading frenzy, suggested investors were betting on higher prices, higher volatility, or both.

Refinitiv data showed retail investors have been buying deep out-of-the-money call options, which have contract prices to buy far higher than the current stock price.

Many of those option contracts were set to expire on Friday, meaning handsome gains for those who bet on a further rise in GameStop’s stock price.

Call options, profitable for holders if GameStop shares hit $200 and $800 this week, have been particularly heavily traded, the data showed. GameStop’s stock traded this week as high as $184.54 on Thursday, far below the $483 intraday high it hit in January.

“The actors are looking to take advantage of everything they can to maximize their impact and the timing is important,” said David Trainer, chief executive officer of investment research firm New Constructs. “The options expiration will contribute to their strategy on how to push the stock as much as they can and maximize their profits.”

Bots on major social media websites have been hyping GameStop and other “meme stocks,” although the extent to which they influenced prices was unclear, according to analysis by Massachusetts-based cyber security company PiiQ Media.

The U.S. Securities and Exchange Commission (SEC) on Friday suspended trading in 15 companies because of “questionable trading and social media activity.” GameStop was not among them.

The 15 companies were in addition to six stocks it recently suspended due to suspicious social media activity.

Robinhood said it has received inquiries from regulators about temporary trading curbs it imposed during a wild rally in shorted stocks earlier this year.

Other Reddit favorites were also lower on Friday, with cinema operator AMC Entertainment down 3.4%, headphone maker Koss off 22.4% and marijuana company Sundial Growers down 2.9%.

(Reporting by Aaron Saldanha in Bengaluru; additional reporting by Caroline Valetkevitch in New York, and Devik Jain and Sruthi Shankar; Writing by David Randall; Editing by Alden Bentley, Shinjini Ganguli, Anil D’Silva, Dan Grebler and David Gregorio)

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