Global Wealth Report 2023; And: Climate tech – the missing piece in the net zero puzzle
High on our agenda this week: The distribution of wealth, the evolution of private households’ financial asset over the past year and what trends we expect - our 2023 edition of the Allianz Global Wealth Report. Ever wondered about the mismatch between reality and expectations as to how the European energy autonomy can be realized? Our insights on the role that ClimateTech can (& should) play. A sneak preview into our global economic outlook scenarios (replay link* from the webinar on September 27 here, the full scenarios being published next week). Plus a Bloomberg live TV interview with Ludovic Subran questioning how long high-interest rates can be sustained given deteriorating credit date and issues in the housing market (as of minute 26’26).
Allianz Global Wealth Report 2023: The next chapter
The comprehensive report for you here.
Everything slump: 2022 was an annus horribilis for savers. Asset prices fell across the board in the "everything slump" scenario. The result was a dismal -2.7% decline in private households’ global financial assets, the strongest drop since the Global Financial Crisis (GFC) in 2008. But some asset classes suffered more than others: While securities (-7.3%) and insurance/pensions (-4.6%) saw strong setbacks, bank deposits showed robust growth at +6.0%, broadly in line with the long-term trend before the Covid-19 pandemic. Overall, financial assets worth EUR6.6trn were lost, with total financial assets amounting to EUR233trn at the end of 2022.
Riding the market wave: Over the long term, the heavily capital markets-oriented US savings behavior has proven to be very smart. There are two sources of growth in financial assets: savings efforts and price increases (increases in value). Over the past 20 years, increases in value have contributed an average of 62% to annual growth in North America; in Western Europe this figure is 37%, and in Germany, growth over the long term has been driven exclusively by fresh savings. This significant difference certainly contributes to the fact that long-term financial asset growth is about 50% higher on the other side of the pond. In general, smart savings behavior is the key to higher wealth growth as returns increase with the level of financial literacy. The difference between low and average financial literacy can reach 1.5pp p.a. Over long investment periods, financial illiteracy can cost a fortune, literally.
Sometimes it hurts instead: In 2022, however, being smart did not pay off: at -6.2%, the decline in financial assets was most pronounced in North America, followed by Western Europe (-4.8%). Asia, on the other hand – with the exception of Japan – still recorded relatively strong growth rates. In emerging markets such as Indonesia, Cambodia or the Philippines, growth was even in the double digits. China's financial assets grew robustly, too, clocking growth of +6.9%. But compared to the previous year (+13.3%) and the long-term average of the last 20 years (+15.9%), this was a rather disappointing development – repeated lockdowns clearly took their toll.
The undisputed hegemon in finance: This different pace of growth has led to shifts in the regional composition of global financial assets. In the last year alone, for example, China's share has risen by 1pp to 14.1%; over the last two decades, its share of global financial assets has increased six-fold. On the other hand, Japan and Western Europe has lost out big time (-17.5pps combined). In sharp contrast, North America has been able to maintain its weight at 47%. The American supremacy is also reflected in per capita financial assets, at least when looking at the averages. In fact, only the Swiss (EUR356,310) are still richer than the Americans (EUR307,940). All other countries follow at a fair distance. Adjusted by liabilities, however, the US overtakes Switzerland (EUR253,450 vs EUR238,780).
Excess savings? What excess savings?: Despite bitter losses, global household financial assets were still nearly 19% above pre-Covid-19 levels at the end of last year – in nominal terms. But adjusted for inflation, global household financial assets were only 6.6% above the 2019 level; that means almost two-thirds of (nominal) wealth growth fell victim to price increases. While most regions could at least preserve some real growth, the situation in Western Europe was different: Any nominal gains in financial wealth were wiped out: real wealth decreased by -2.6% over 2019.
No tailwinds: After the decline in 2022, global financial assets should return to growth in 2023. This is supported above all by the (so far) positive development on the stock markets, even if setbacks are still to be expected until the end of the year. All in all, we expect global financial assets to increase by around +6%, also taking into account a further "normalization" of savings behavior. Given a global inflation rate of around 6% in 2023, savers around the world should be spared another year of real losses on their financial assets. But the mid-term outlook is rather mixed. Given that prices will very likely remain above the 2% target for the time being for structural reasons, the monetary stance will at best be neutral: monetary tailwinds will not blow. Strong economic tailwinds also cannot be expected. The recovery of big economies such as the Eurozone and the US might be rather lackluster, and the Chinese economy has ceased to be the global growth engine. Therefore, average growth of financial assets is likely to hover between +4% and +5% over the next three years, under the assumption of “normal” stock market returns. But like the weather, which gets more extreme amid climate change, more market swings are to be expected in the new geopolitical and economic landscape. “Normal” years might rather become the exception.
The comprehensive report for you here.
Climate tech – the missing piece in the net zero puzzle
The full analysis for you here.
The upcoming years are set to be pivotal in determining the success of the global net zero transition and will define the landscape of the future green economy. Achieving European energy autonomy and the targeted 55% reduction in greenhouse gas emissions by 2030 requires a competitive ClimateTech industry. Are we on the right track and what has still to be done?
The ClimateTech industry is set to grow threefold, reaching a market size of EUR600bn by 2030. However, Europe’s position in this emerging market cannot be taken for granted – without further efforts, Europe is likely to lose the race against the US and China.
The mismatch between reality and expectations is alarming. To reach its own climate targets, Europe needs to increase its annual investments in ClimateTech to the tune of EUR140bn in the public sector and EUR560bn in the private sector, compared to the last decade. The current investment gap in the European energy sector alone is as high as EUR200bn per year, with EUR40bn and EUR160bn of missing public and private funding, respectively.
Investments in ClimateTech start-ups by venture capital and private equity have boomed in the last few years, reaching almost USD100bn (EUR93bn) in 2022 worldwide; Europe accounts for around 30% of this. However, funding of sub-sectors is rather uneven: The sectors with the highest emissions (particularly manufacturing, the agrifood sector and the building sector) – and therefore the greatest potential to decarbonize – do not receive the most funding (which goes into the energy and transport sectors).
Beside funding and subsidies, there is a long list of measures that would improve conditions for Europe’s ClimateTech industry: reducing red tape, clearing the jungle of funding schemes and streamlining application processes; updating procurement policies to favor start-ups; increasing collaboration between investors and universities building research ecosystems; facilitating the use of institutional capital for ClimateTech investments and improving capital market conditions.
It is not too late for European policymakers, investors and scientific institutions to speed up. But fast, targeted and impactful measures are required to create an environment for European ClimateTech to thrive and become global category leaders. The time to act is now.
The full analysis for you here.