The latest Reserve Bank bulletin helps provide a better understanding of the extent of the financial crisis-inspired changes to the risk-appetites of households. It also says that Australians are, in general, rational when it comes to their savings.
The bulletin focuses on movements in households’ holdings of financial assets but those could be read as a wider signal of behaviour and reasoning.
What it shows was that in the lead-up to the global financial crisis, households pumped funds into the sharemarket. From 2003 the share of household financial assets held in equities, directly and via superannuation funds, rose from about 35% to about 45% by 2007.
The reason for that surge in the proportion of equities within Australians’ investments is obvious — the sharemarket was booming, returning an average of 20% per annum versus deposit rates that averaged 5%. The combination of increased volumes flowing into equities and those returns explain the scale of that increase in exposure to equities.
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Not surprisingly, when the bubble burst and the crisis erupted, that combination of value and volume worked in reverse.
Between 2008 and 2011 there were, the bulletin says, net outflows from households’ direct holdings of equities of about $67 billion, while holdings of deposits increased by about $225 billion. That shift from equities to deposits continues, aided by the deposit wars the big banks have been conducting to displace funds that were once raised in now-volatile wholesale debt markets offshore.
The plunge in equity markets as the crisis developed, the losses experienced and the high volatility since are very rational reasons for households to exit the market and remain largely on the sidelines, in terms of their direct holdings and their superannuation funds. Superannuation represents almost 60% of households’ financial assets. Self-managed funds have been particularly conservative.
There has been a significant change in the relationship between equity returns and the real returns from deposits since the crisis.
According to the bulletin, over the past 30 years the average annual total (dividends plus capital gains) return on Australian equities exceeded the average annual real return on deposits by about 5.5 percentage points. Since 2008 the real returns from equities have averaged -5% while the real return from deposits has averaged a positive 2.5%.
Equity returns have also got riskier, with sharemarket volatility — the standard deviation of monthly returns — rising from about 2.5 percentage points between 2003 and 2007 to about five percentage points between 2008 and 2011.
Faced with negative returns and greater risk households have obviously done the obvious and shunned the market — between 2006 and 2010 the proportion of households owning equities directly fell from 38% to 34% and the share of their financial assets directly invested in equities from 18% pre-crisis to 8%.
One could extrapolate broader changes in behaviour from the analysis in the bulletin, which sends a broad signal of risk aversion and caution that is reflected more widely in conservative and thrifty consumers.
It is also not just about the sharemarket — Europe remains on the verge of something unpleasant, Australian property prices have been sliding, households costs have been rising and there is also the unusual and unsettling make-up of federal Parliament to make consumers and savers nervous about accepting risk and anxious to deleverage and increase and safeguard their savings. The fact that bank deposits are largely guaranteed would add to the appeal of deposits relative to equities.
It would appear logical that to get households off the sidelines and back into the market would require a more stable and positive tone to the sharemarket, more stability and less job-shedding in the non-mining sectors of the economy, some sort of “solution” that stabilises Europe and a more conventional parliament in Canberra.
None of those things are likely to be in place in the near term — the restructuring of Europe’s finances, if it can be done, will be a long-term project — which presumably means households will remain defensive for quite some time to come.
What we’ve seen in the behaviour of households post-crisis appears to be more structural than the cyclical opportunism that characterised the pre-crisis boom. In the long run that’s a good thing — the kind of credit growth seen in the lead-up to the crisis was unsustainable and potentially highly destructive — but in the meantime it is that pervasive caution that is undermining the non-resource side of the economy.
*This article was first published at Business Spectator