Source: Allianz Research
Financial assets: Surprising relief
In economic terms, 2023 turned out differently than many expected. On the one hand, the US economy, where the predicted recession did not materialize – primarily thanks to US consumers' propensity to spend. And then the Chinese economy, whose recovery after the long phase of COVID-19 lockdowns proved to be short-lived – the ongoing problems in the real estate market dampened sentiment. And finally, the financial markets recovered strongly – despite further interest rate hikes by the central banks of 100 basis points (USA) and 200 basis points (Europe). However, it was not these interest rate hikes that were decisive for the markets, but the question of when the interest rate turnaround would end. In fact, the US and European central banks carried out their last interest rate hikes for the time being in July and September 2023 respectively. This and the expectation of future interest rate cuts led to great optimism on the stock markets: US equities (S&P 500) achieved a strong gain of 24% and even German equities (DAX) rose by 20% - despite the shrinking economy. At the same time, government bond yields fell (Europe) or remained virtually unchanged (USA).
Against this backdrop, the global financial assets of private households also recorded significant growth: With an increase of 7.6%, the losses of the previous year (-3.5%) were more than made up for. Overall, total financial assets amounted to EUR 239 trillion at the end of 2023 (Figure 1). While this exceeded the record set in 2021, financial assets relative to economic activity (financial assets as a % of GDP) were still significantly lower at 275% (2021: 307%). This reflects not least the high price increases of recent years, which inflated nominal GDP.
Figure 1: Surprising relief
Gross financial assets, in 2023 trn EUR and annual change in %
Growth in the three major asset classes - bank deposits, securities (including investment funds) and insurance policies/pensions - was quite uneven (Figure 2). Securities (11.0%) and insurance/pensions (6.2%) benefited from the stock market boom and the decline in long-term interest rates and grew significantly faster than the average of the last ten years. In contrast, growth in bank deposits fell to 4.6% after the pandemic-related boom years, recording one of the lowest increases in the last 20 years. This was mainly due to US households, which liquidated bank deposits on a large scale, a reason for the resilient US consumption.
Figure 2: Securities and insurance/pensions recover
Gross financial assets in 2023 EUR, annual change in %
Source: Allianz Research
Huge differences in portfolio structures
Globally, securities are by far the most important asset class. They accounted for 42.8% of global financial assets in 2023.This share is only slightly below the record year 2021 (43.2%), but still above the figure before the global financial crisis (2007: 41.0%), for example. Over the last two decades, the importance of shares, investment funds and other securities has risen continuously, despite some setbacks on the stock markets: overall, the portfolio share increased by 6 percentage points.
Conversely, the share of insurance/pensions has fallen by 6 percentage points to 26.6% over the same period, although this is partly due to the fall in value in the wake of the interest rate turnaround. Nevertheless, the fact that insurance/pensions – the preferred savings vehicle for financial provision for old age – are losing importance in rapidly ageing societies is rather worrying; the opposite would be desirable. As a result, bank deposits were the more popular savings vehicle in 2023 (as in 2022) with a share of 28.0%. In all other years, however, insurance/pensions were more important, at times with a lead of 7 percentage points over bank deposits. Only the turnaround in interest rates reversed the situation. The share of bank deposits remained relatively stable over the long term, with an increase of 1.8 percentage points compared to 2003 (at the expense of the category “others”).
However, the differences between countries and regions are very large (Figure 3). Insurance/pensions, for example, hardly play a role in Eastern Europe – but are the dominant asset class in Australia and – albeit narrowly – in Western Europe. The same can be said of bank deposits: while they play only a minor role in America (North and South), they are the most popular savings vehicle in Eastern Europe and Asia – with the exception of China, where wealth management products are very popular. Americans, on the other hand, rely mainly on securities, especially shares and investment funds. These different portfolio structures once again demonstrate the strong divergence in savings behavior worldwide.
Different portfolio structures once again demonstrate the strong divergence in savings behavior worldwide.
Figure 3: Huge differences in portfolio structures
Gross financial assets, by asset class in 2023 EUR, in % of total gross financial assets
Source: Allianz Research
No place for bank deposits
In 2023, the normalization of savings continued after the pandemic-related boom years of forced savings. Last year, they fell by 19.3% to EUR 3.0 trillion (Figures 4 and 5). This means that (adjusted for inflation) they were roughly back at the level of the years before the pandemic. This decline is almost exclusively attributable to bank deposits: On balance, banks worldwide only received EUR 19 bn, a slump of 97.7%, which – as already mentioned – is primarily due to US households: they liquidated deposits worth EUR 650 bn. However, it was not only the Americans, but also Italian, Belgian and Spanish households that shifted funds and withdrew deposits from banks on balance. Only Japanese households remained loyal to their banks: At EUR 101 billion, Japanese bank deposits were increased more than in any other country, closely followed by Korean (EUR 95 billion) and German deposits (EUR 92 billion).
The other two asset classes, on the other hand, remained popular with savers. Inflows into securities even increased once again – from their record level of the previous year – by 10.0%. However, there was a notable change of favorites within this asset class: while shares were sold on balance in many markets after the miserable performance in 2022, savers made strong gains in bonds, thanks to the turnaround in interest rates. This led, for example, to an 84.3% increase in securities purchases in Western Europe – European savers have never been more fond of securities, especially Italian savers, who rediscovered their old love of government bonds.
Finally, insurance/pensions proved to be relatively robust in the difficult environment of the interest rate turnaround, with the decline in fresh savings worldwide amounting to just 4.9%. This was mainly due to the stability of cash inflows in the USA. In Western Europe, on the other hand, the decline was more than twice as steep at 13.7%; households in the eurozone in particular turned their backs on insurance/pensions and invested less than EUR 100 billion a year in this asset class for the first time.
Figure 4: No place for bank deposits I
Flow of funds by asset class, in 2023 EUR trn
Source: Allianz Research
Figure 5: No place for bank deposits II
Flows by asset class and regions, in 2023 EUR, as % of total flows
Source: Allianz Research.
Savings behavior is a decisive key to asset growth. This becomes clear when the composition of asset growth is analyzed in more detail. There are basically two sources of growth in financial assets: savings efforts and price increases (increase in value). Over the last 20 years, increases in the value of portfolios in the USA have contributed an average of 62.4% to annual growth; in Western Europe, this figure is 34.2% (in Germany, growth over the long term is driven almost exclusively by savings). This significant difference certainly contributes to the fact that long-term growth in financial assets is significantly higher on the other side of the pond: While financial assets in Western Europe have doubled in the last two decades (+104%), the increase in the USA is a whopping 178%. However, it is not only savings behavior but also general market movements that play a role – again to the advantage of US households, who benefit from the strong US stock markets. Above all, however, the market environment is also reflected in the differences in financial assets between the generations. The baby boomers are therefore likely to be the richest generation that has ever lived, at least in the advanced economies. (see box)
Are Baby Boomers the wealthiest generation that ever lived?
Baby boomers, generally defined as those born between 1946 and 1964, are often considered the wealthiest generation in history. A unique historical situation – strong economic growth, affordable housing markets and booming equity markets – allowed them to build up a handsome fortune.
Let's take a closer look at the accumulation of their financial wealth. We simulate the life savings of two exemplary members of this generation, Sabine from Germany and Mary from the US, both born in 1960. In our analysis we assume an average equity ratio of 45%, an annual savings rate of 10% and a savings phase of 40 years, starting at the age of 201. Under these assumptions Sabine achieved an average nominal return of 6.1% per year resulting in total savings of 614% of her disposable income at 60. This is already quite impressive, but is even significantly below Mary's performance: Thanks to an equity risk premium around twice as high as in Germany, she generated lifetime savings of over 850% of her disposable income with a return of 9.1%.
What’s in store for the generations X to Z?
All savers of the following generations are still in the process of building up their savings2, like our exemplary members of Gen X (born between 1965 and 1980), Michael from Germany and Christopher from the US, both born in 1974. Although they still benefited from the flourishing 1990s, our calculations suggest they will end up with an average annual return of 3.8 % and 6.7%, respectively, resulting in total savings of 417% and 606% of their disposable income. Well below the Baby Boomers, but they still fared better than the Millenials (born between 1981 and 1996).
This generation has had a rougher ride. Just as they were beginning to save, they were hit by one crisis after another. Against this background, our exemplary German Millenial, Stefanie, born in 1984, had a doubly difficult start: Her average disposable income grew at a disappointing 1.8% per annum over the first decade of her savings phase (against the long-term average of +2.7%). This was compounded by the weak equity performance due to the Global Financial Crisis. With the beginning of the second decade, she slipped into the phase of low or zero interest rates. We expect her average return after 40 years to be only 3.1% – roughly half of what our Baby Boomer Sabine raked in. For our US-American Millenial, Ashley, on the other hand, the difference in returns compared to Baby Boomer Mary is smaller, but still significant (6.5% vs 9.1%). Stefanie’s total life savings will sum up to just over 430% compared with 614% for her parents' generation. According to our calculations, Ashley is likely to achieve savings of just under 670% of her disposable income compared with around 850% for our Baby Boomer Mary.
Gen Z (born between 1997 and 2012) shares the same fate as Gen X and the Millennials: Even with the same savings behavior, no generation can match the wealth accumulation enjoyed by the Baby Boomers (Figure 6.1). Maximilian, a member of Gen Z in Germany and born in 2004, achieves total savings of 464% of his disposable income in 2063. This result is better than Michael’s (+47pps) and Stefanie’s (+33pps), but significantly worse than Sabine’s (-150pps). In terms of average total return, at 3.6% per year Maximilian ends up between Michael (3.8%) and Stefanie (3.1%), but also well below Sabine (6.1%).
Figure 6.1: The older the better I
Germany: Total savings as % of disposable income and nominal return by generation, average in %
Sources: Deutsche Bundesbank, Destatis, The Federal Reserve, LSEG Datastream, Allianz Research
The results are similar for our US-American Gen Z member, Jacob (Figure 6.2): Jacob’s total savings are expected to amount to 766% of his disposable income in 2063. This result surpasses Christopher's by 159pps and Ashley's by 96pps, yet it falls significantly short of Mary's by 86pps. Regarding average total return, Jacob achieves 7.2% per year, outperforming Christopher's 6.7% and Ashley's 6.5%, but still trails behind Mary's 9.1%.
Figure 6.2: The older the better II
US: Total savings as % of disposable income and nominal return by generation, average in %
Sources: Deutsche Bundesbank, Destatis, The Federal Reserve, LSEG Datastream, Allianz Research
The die is not yet cast
Members of Gen X, the Millenials and Gen Z are still in the process of building up their financial wealth, and, to a certain extent, savers are able to maximize their life savings. On the one hand, they can increase their savings effort, i.e. their annual savings rate, and on the other hand, they can invest a larger portfolio share in riskier but higher-yielding asset classes. Of course, macroeconomic factors such as the interest rate environment or the level of the risk premium are beyond their control. Nor can they fully determine the level or growth of their income.
We look at four different scenarios to see how they can adapt their savings behavior and react to changing framework conditions. The aim is to achieve the savings-to-income ratio of our Baby Boomers Sabine and Mary at the end of the savings period at 60. In scenarios #1 (“Higher savings efforts”) and #2 (“Higher risk appetite”), the economic framework conditions remain unchanged. In scenario #1, savers only adjust their savings rate, in scenario #2 they additionally adjust their risk profile towards riskier assets (equities)3. In our so called “Green and AI boost” scenario #3, in which bond yields, the equity risk premium and income growth rise, savers in turn only adjust their savings rate. The same applies to scenario #4 (“Permanent poly crisis”), in which – vice versa – bond yields, the risk premium and income growth fall.
Table 1 provides an overview of the necessary adjustment of the savings effort in order to catch up with the Baby Boomers and the changes that result in the return achieved under the different scenarios. For Gen X, who only have a decade left to build up their assets, this savings target can only be achieved with an extremely high savings effort: The savings rates would have to almost triple. This is rather unlikely.
Even for the Millennials, who still have half of their savings phase ahead of them, achieving the savings target is likely to be a challenge; even in the benign scenario #3, the savings rate should increase by more than 50%. For members of Gen Z, however, who have only just started saving, the necessary increase in the savings ratio seems to be within a manageable range. This generation (still) has the greatest possible flexibility to adjust their savings behavior.
Table 1: The older the better II
Table 1: Keeping up with the Baby Boomers - change in...
Sources: Deutsche Bundesbank, Destatis, Federal Reserve, LSEG Datastream, Allianz Research
So are the Baby Boomers the wealthiest generation that ever lived?
For now, yes. But the future holds exciting potential for the generations that follow. Taking into account the end of the savings glut and the rising demand for capital to drive green and digital transformations, Gen Z actually has a good chance to outperform all their predecessors – if they align their savings behavior to the new realities. And let us not overlook an important fact: the day will come when the Baby Boomers bequeath their wealth to their children and grandchildren. Projections indicate that, in the United States alone, more than USD 84 trillion in assets will be transferred to younger generations by 2045, with over USD 53 trillion of that wealth originating from Baby Boomer households4. This sets the stage for Millennials to potentially become the richest generation in history – albeit not solely through their own endeavors.
Exceptional China
In contrast to the “annus horribilis” of 2022, in which financial assets shrank in many markets and regions – and also worldwide – the recovery in 2023 was broad-based (Figure 7). In fact, only two countries – New Zealand and Thailand – recorded negative growth rates that year. Moreover, growth was relatively uniform across all regions, not least in Asia and North America, which both grew by over +8% – with the US (+8.6%) growing even more strongly than China (+8.2%). Only Western Europe (+5.0%), where the UK's weak performance (+1.5%) dampened growth, and Eastern Europe (+18.0%), where hyperinflation in Türkiye led to high (nominal) growth rates, were somewhat out of line.
Figure 7: Uniform growth
Gross financial assets, CAGR 2002-2022 and growth 2022 / 2021, in %
Source: Allianz Research
The long-term development over the last 20 years naturally shows greater differences, with the catch-up effects of the emerging economies taking full effect: China, Latin America and Eastern Europe are achieving double-digit growth rates per year, while Japan is only growing at +2% and Western Europe at just under +4%. The development of financial assets in China in particular is breathtaking at first glance. Does this also stand up to closer scrutiny, i.e. an adjustment for population growth and inflation? Figure 8 provides the answer. On a per capita basis, the annual growth rates are just under 1pp lower on average. This applies to all regions – with the exception of Japan, where per capita growth is slightly higher thanks to the decline in population. Adjusting for inflation has a much greater impact. Growth is then halved worldwide, with inflation driving a large wedge between nominal and real growth rates, particularly in Eastern Europe and Latin America. Only two markets escape this development: Japan and China. Although real growth is lower here too, the discrepancy is not very large. Per capita assets in Japan have actually grown slightly faster in real terms than in Western Europe over the last 20 years. And the gap between China and the rest of the world is huge in real terms: the growth advantage over the rest of the world is almost 10pps – per year! In fact, the purchasing power of average per capita financial assets in China has increased tenfold in just 20 years. The closest countries to this progress are Bulgaria and Romania, which have seen an enormous increase in prosperity since EU enlargement: Real per capita financial assets have increased eightfold and sixfold respectively in this period. In India, the corresponding figure has increased fivefold.
The purchasing power of average per capita financial assets in China has increased tenfold in just 20 years.
Figure 8: Exceptional China
Gross financial assets per capita, nominal and real CAGR 2004-2023, in %
Source: Allianz Research
Lost years
However, inflation has only become really painful in recent years, with double-digit rates in Europe, for example. The real gains in prosperity are correspondingly modest (Figure 9). At the end of 2023, real financial assets worldwide were only at the level of 2020 – the last three years were lost years in this respect. Compared to the pre-Covid year, however, there was still an increase of +9.1%. Around a third of the nominal growth in this period was retained, while two-thirds fell victim to inflation.
But the regional differences are again large. While Asia grew in real terms over the years – thanks to relatively low inflation rates – and real financial assets were 26.3% higher at the end of 2023 than in 2019, the trend in Western Europe was diametrically opposed: real financial assets have shrunk in recent years and are now 4.3% lower than in 2019. European households can therefore look back on four lost years. The trend in North America was not quite as bad: although it is still below the 2020 figure, the increase compared to 2019 was 6.0%: Inflation did not eat up all of the growth in financial assets, but “only” a good three quarters.
Figure 9: Inflation bites
Gross financial assets, nominal vs. real development (indexed, 2019=100) and average cpi (2020-2023, in %)
Source: Allianz Research
Exceptional US
In one respect, 2023 represented a return to the new reality of de-globalization: The growth advantage of the emerging economies over the advanced economies has shrunk significantly again, amounting to just 2pp last year (Figure 10). Until 2017, the year in which the trade disputes between the USA and China broke out under President Trump, there was still a growth gap of 10pp or more between these groups of countries. In 2022, this growth gap widened again, triggered by the market turbulence caused by the interest rate turnaround, which mainly affected the USA and Western Europe. As expected, however, this return of the gap appears to have turned out to be just a “blip”.
Figure 10: The new reality of de-globalization
Gross financial assets in 2023 EUR, annual change in %
Source: Allianz Research
The fact that emerging economies have largely lost their growth lead in six of the last seven years is primarily due to developments in the US. During this period, the financial assets of US households not only grew twice as fast as in Western Europe, but also faster than the global average and roughly on a par with Chinese financial assets. The consequence of this performance is also reflected in the regional distribution of global financial assets (Figure 11): North America's share has barely changed in the last 20 years. The richest region in the world by far has kept its share largely constant – this once again underlines the exceptional role that America plays in the area of finance. By contrast, the other developments were predictable: while China's share skyrocketed from 2.6% to 14.1%, Japan (-6.9pps) and Western Europe (-9.3pps) lost significant ground.
Figure 11: Exceptional US
Gross financial assets, regional split 2003 and 2023, in 2023 EUR, in %
Source: Allianz Research
American supremacy is also reflected in per capita financial assets, at least when looking at the averages: in fact, only the Swiss are richer than the Americans. All other countries follow at a respectable distance (Figure 12).
Looking at this ranking, it is noticeable that the top ten is dominated by up-and-comers. Although Switzerland and the US have dominated the list of the richest countries for years, they are followed mainly by countries that have gained places over the last two decades, such as Denmark (+3), Singapore (+4) and Canada (+4); only the Netherlands is out of line (-3). Places 10 to 20 are mainly occupied by relegated countries such as Japan (-10), Italy (-8) and Belgium (-6). A word on Germany: although 17th place is still rather disappointing in view of its high economic strength and savings performance, it is at least one of the few Eurozone countries to maintain its ranking.
Beyond the top 20, the picture is also relatively mixed. This applies to Eastern Europe, for example, where the Baltic states Estonia (+6 to 26th place), Lithuania (+8 to 29th place) and Bulgaria (+7 to 35th place) are big “winners”, but Slovakia (-5 to 36th place) and Poland (-3 to 37th place) are also “losers”. The picture is similar in Asia: alongside China (+8 in 32nd place) and Vietnam (+8 in 49th place), there are countries such as Thailand (-9 in 44th place) and Malaysia (-10 in 38th place).
Figure 12: The rich and the very rich
Gross financial assets per capita in 2023 EUR (change in ranking since 2003)
Source: Allianz Research
The economy and markets are likely to oscillate between fear of crisis and euphoria about change for the foreseeable future.
Outlook
Global financial assets should continue to grow in 2024. This is supported above all by the positive trend on the stock markets (so far). However, the turbulence over the summer has also made it clear that prices are on thin ice and a continuation of the rally is by no means certain. A correction before the end of the year cannot be ruled out. However, monetary policy should provide a tailwind. In view of the now significant decline in inflation, the most important central banks will cut interest rates (further). This also seems appropriate against the backdrop of renewed fears of recession. It is therefore likely that economic growth this year will be at a similar level to last year. This also applies to savings efforts, which we do not expect to decline further. These considerations lead us to expect global financial assets to grow by +6.5% in 2024.
The medium-term outlook is of course characterized by even greater uncertainty. This applies not least to the two megatrends of AI and sustainability. The potential of AI is undisputed, but it is just as undisputed that not all of the dreams will come true and that not all share valuations will prove to be justified. A certain disillusionment after the initial euphoria is already noticeable. In addition, it will probably be years before the AI boom reaches the entire economy and leads to productivity increases across the board. There are also increasing question marks over the issue of sustainability and the green transformation. Not because its necessity is disputed. But the difficulties in terms of costs, technology and regulation are being perceived more strongly again. This has already led to ESG investments performing worse than the market in recent years, for example. The green boom in the economy and stock markets is still a long time coming – but with the right (political) framework set, it is still possible. This brings the biggest problem into focus: political uncertainty, be it on a national level – keyword: the rise of extreme parties – or on an international level – keyword: geopolitical crises and increasing fragmentation. Bottom line: in view of this mixed situation, only modest growth in financial assets of 4% to 5% can be expected over the next few years – albeit with high volatility: the economy and markets are likely to oscillate between fear of crisis and euphoria about change for the foreseeable future.
1 For further details on the assumptions and calculation method please see 2024-04-11-Savers-Eurozone.pdf (allianz.com)
2 Therefore, we have to build assumptions on income and market developments for the next decades. To keep things simple, we basically extrapolate past trends, ensuring comparability. It goes without saying that radical different assumptions, say, AI turbo-charged income growth or anemic equity markets due to global fragmentation, would alter the results. For different scenarios see below.
3 However, the room to maneuver differs between the generations. Gen X, already in its last decade of asset accumulation and close to retirement, cannot shift into equities but should keep a ratio of 30% (as assumed in the basic scenario). Gen Z, on the other hand, can alter its risk profile quite substantially, having the longest investment horizon.
4 See Cerulli Assciates, 2022: U.S. High-Net-Worth and Ultra-High-Net-Worth Markets 2021
