Portfolio Composition


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Healthy balance sheets

With country indebtedness a central investment theme in financial markets, the focus is very much on the health of country balance sheets. However, another key and often overlooked economic pillar is the strength of household balance sheets.

The size and composition of household balance sheets drives a wide range of economic trends – from spending on public goods like education and health care, and the sophistication of financial systems to the rise and fall of housing markets to name but a few. We observe great variation in the assets and liabilities of household balance sheets on account of factors such as different personal circumstances, past opportunities and decisions, the vagaries of asset price changes and random forces. However, systematic variations are observed across wealth levels, age groups, gender and – most especially – countries.

Household balance sheets – financial and non-financial assets, and debt

Consider first the relative importance of financial versus non-financial assets, and the size of debt. Expressed as a percentage of gross household assets, the pattern clearly differs markedly between poorer and richer countries and regions. In developing countries (see Figure 3.1), for example India and Indonesia, it is common for 80% or more of total assets to be held in the form of non-financial assets, largely housing and farms.

A high proportion of real property is also evident in transition countries in Europe, reflecting in part the wholesale privatization of housing in the 1990s. As countries develop and grow, the importance of non-financial assets tends to decline, so that the share in China, for instance, is now close to half. In the richest countries, financial assets typically account for more than half of household wealth.

There are interesting exceptions to this general pattern. Recent robust house price rises have propelled the share of non-financial assets above 60% in France and some other major European countries. South Africa, on the other hand, is an outlier in the developing world, with exceptionally high holdings of financial assets: the figure of 80% exceeds the share found in both the United States and Japan.

Financial assets: equities, bonds or cash?

Figure 3.2 provides more detail, showing the breakdown of financial assets into three categories: currency and deposits, equities (all shares and other equities held directly by households), and other financial assets for selected countries. To add further detail, in most countries the reserves of life insurance companies and pension funds form the largest component of “other financial assets.”

The composition of financial assets differs considerably across countries, especially with regard to the importance of shares and other equities. One interesting trend we note is that equities are not always a large component of household financial wealth, even in countries with very active financial markets. In the United Kingdom and Japan, for example, equities account for just 13% and 9% of total financial assets respectively. In contrast, they make up 37% and 43% of financial assets in Sweden and the USA, respectively.
Broadly speaking, the relative importance of currency and deposits falls as that of bonds and equities increases. On the other hand, the portfolio share of “other financial assets” does not vary a lot, staying in the range of about 40%–45%. However, when we come to the UK, Japan and Colombia, which have the lowest portfolio share of equities, the pattern breaks down. The UK has a moderate currency and deposits share, but the largest “other financial assets” share, reflecting large life insurance and pension reserves. Colombia also has more in the form of “other financial assets” than is typical. Japan, on the other hand, which has a strong tradition of saving in deposit form, has a very large currency and deposits share and only a 35% share of “other financial assets.”

Where is the debt?

Household debt is relatively low in developing and transition countries, less than 10% of total assets overall. This is in marked contrast with research showing a link between debt and poverty in richer countries. But less developed financial markets (and weak property rights) mean that household demand for credit is often not satisfied. As a consequence, the highest levels of debt are seen in developed countries with well functioning institutions and sophisticated credit markets. The typical level is 15%–20%, but household debt in Nordic countries like Denmark is higher, in part reflecting high levels of student debt with little incentive for early repayment.

The impact of the credit crisis

In the light of the global financial crisis, it is also interesting to examine how the overall composition of personal wealth and, in particular, the proportion of financial assets to total household assets has changed over the past decade. A decline in the relative importance of financial assets in 2008 is evident for Singapore and, most especially, China. In other countries, the credit crisis tended to depress both property prices and share values, so the share of financial assets is more stable.

Longer term, the share of financial assets seldom appears to have changed dramatically. In France, a decade of strong property price increases has reduced the share from 45% to 35%. The USA also showed a relative decline in financial assets from 2000 to 2005, but the booming stock market then improved the share until brought to a halt by the global financial crisis.

Japan shows a rise in the proportion of financial assets during 2000–2006, but the subsequent decline means that the share is now back to the level of 2001. Among the developing nations, the trend in the financial asset share in Indonesia is almost flat, but the trend is upwards in India, with a noticeable jump in 2009.

Household debt levels have risen in the USA and UK

Debt trends show more variability across countries. Much of the developing world escaped the trend toward rising household debt in recent years, so nations with a low level of debt often show a fairly stable profile. However, the apparent stability disguises a rise in the debt ratio from 1.9% to 2.6% in Indonesia and from 2.8% to 4.1% in India.

The share of debt rose in most other countries. Debt increased in the USA from 15.7% of gross assets in 2000 to peak at 23.4% in 2008 before falling back to 20.4% in 2010. The UK exhibited a very similar pattern, with the debt ratio rising from 13.2% to 19% between 2000 and 2008, then dropping to 15.3% in 2010. By contrast, debt was very stable in Japan, and rose only gradually in Italy over the 2000–2010 period from a low initial level. Debt rose sharply in Denmark, this time from a high starting point. Both South Africa and the Czech Republic exhibited very erratic movements, with no strong trend in either direction. One of the few countries to buck the trend was Singapore, where the ratio of debt to gross assets fell almost continuously from 19.8% in 2000 to 12.8% in 2010.

The significance of components of wealth

The composition of household balance sheets is a very important driver of trends in consumption and investment, and in many ways a reflection of the financial development of individual countries. For instance, debt as a proportion of total household assets tends to be low in developing countries because financial intermediation and property rights are underdeveloped, while debt levels in European countries are relatively high, reflecting a much more developed financial system.

Our analysis splits household balance sheets into financial and non-financial assets and debts. In general, non-financial assets like housing and land make up a relatively large proportion of developing world assets. A similar trend is evident in developed countries like France, where house prices have risen steadily in the past decade. On the other hand, financial assets form a much greater proportion of balance sheets in countries like the USA, Japan and Switzerland, with cash deposits and “other” (i.e. pension funds) the preferred asset classes in general. We also note that, in the rise up to and through the credit crisis, household debt levels have risen in both the USA and the UK.

Although the proportion of financial assets relative to total assets held by households tends not to vary greatly over time, the credit crisis appears to have brought a halt to trends in rising financial assets in the USA and property ownership in France.



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