Financial accounts
- The financial wealth of Australians rose in the December quarter – largely due to 4.5 per cent rise in equity markets. Net financial assets of households rose by 3.4 per cent after rising by 8.1 per cent in the
September quarter. - Per capita financial wealth rose by almost $1,400 to $46,330 in the last quarter – marking the highest reading in almost three years. Financial wealth is down 12.7 per cent below the record set in late 2007 Australian companies are maintaining very liquid balance sheets. Corporate Australia held a record $277.6 billion in cash and deposits as at December. As a proportion of total financial assets, companies held 30.5 per cent of financial assets in cash – the highest in 11 years.
- Assets held by superannuation funds (pension funds) rose by $40 billion (3.7 per cent) in the December quarter to $1120.9 billion. Super funds held 15.1 per cent of assets in cash and deposits, similar to 15.2 per cent held in September and well above the long-term average of 8 per cent.
- Foreigners purchased $20.3 billion of Australian equities in the December quarter – the highest result in 15 months – since September 2009. In the December quarter the Aussie dollar hit highs of US101.5 cents in early November, before easing over the following month, thus providing a buying opportunity for foreign investors.
What does it all mean?
- The latest data on household wealth certainly provides Aussie households with a bit of cheer and could not come at a better time, especially given the current level of conservatism. The global financial crisis caused the biggest ever drop in wealth for Australian households, however wealth levels have continued to repair over 2010 and are now holding at the best levels in almost three years.
- Despite the sustained improvement in wealth levels household continue to save. With almost 25 per cent of total assets being held in cash and deposits – well above the long-term average of 22.7 per cent. The current level of consumer conservatism is unlikely to turnaround anytime soon, however the improvement in household balance sheets certainly bodes well for future spending.
- It’s not only household wealth levels that have improved but also company balance sheets are certainly looking much healthier. Corporate Australia held a record $277.6 billion in cash and deposits as at December and the proportion of total financial assets, companies held in cash is now at the highest level in 11 years.
- The strength in share markets has certainly been the key driver of the turnaround in wealth and more importantly the pickup wealth is expected to continue. CommSec expects a sustained recovery in wealth over coming quarters. The rebuilding in the second half of the year will help to support activity and spending levels, while at the same time corporate Australia is likely to ramp up investment plans.
- Australian superannuation funds are holding almost double the ‘normal’ proportion of money in defensive assets like cash and bank deposits. That is not to say that super funds have not been investing in equity markets rather the equity investments have been less than the cash inflows record by fund managers. No doubt as the global economy strengths and the recovery look more concrete pension funds will feel more comfortable with allocating a larger proportion of inflows to growth assets.
- Foreign investors have become more prominent investors in our companies. At the end of the December quarter, foreigners owned almost 42 per cent of Australian listed companies, holding just shy of the 12 year highs reached in the March quarter 2009. And in the December quarter alone, foreigners made over $32 billion in net purchases of Australian equities. The movements in the Australian dollar is an important factor in driving foreign investment and if the Aussie dollar does start to ease over rest of the year – as our currency strategists expect – further inflows of funds are likely to take place. Added to which equity markets are likely to get a boost from M&A activity largely driven by cashed up companies and foreign investors.
What do the figures show?
- The net financial wealth of Australian households (assets less liabilities) rose sharply by 3.4 per cent in the December quarter after rising by 8.1 per cent in the September quarter.
- Financial assets of households (such as shares, bank deposits) rose by $58.8 billion or 2.4 per cent in the December quarter to $2,557 billion. Of the total, 24.9 per cent was held in cash and deposits, above the long-term average of 22.7 per cent. Financial liabilities of households grew by $24.3 billion or 1.6 per cent to a record $1,515 billion.
- Overall, net household financial wealth (assets less liabilities) rose by $34.5 billion to $1041.6 billion at the end of December quarter. Financial wealth is up 4.0 per cent on a year ago but is still down 12.7 per cent from the record high set in the September quarter 2007.
- Net household wealth per capita rose from $44,936 to $46,330. Per capita wealth is up only 7.0 per cent over the past five years and up 32.2 per cent over the past decade.
- The household debt to liquid assets ratio fell by 0.4 percentage points to 160.1 per cent in the December quarter. The ratio shows that households do not have sufficient readily liquefiable assets to cover outstanding debt, highlighting a degree of vulnerability in the current economic environment.
- Foreigners purchased $20.3 billion of Australian equities in the December quarter – the highest result in 15 months – since September 2009. In the December quarter the Aussie dollar hit highs of US101.5 cents in early November, before easing over the following month, thus providing a buying opportunity for foreign investors.
- Foreign investors held $586.2 billion of Australian listed shares as at the end of December, up $31.9 billion (5.8 per cent) over the quarter. Foreigners held 41.9 per cent of Australian shares, unchanged over the quarter and not far short of the 12-year high of 43.3 per cent in March 2009 (when the Aussie was at US68.7 cents).
- Assets held by superannuation funds (pension funds) rose by $40 billion (3.7 per cent) in the December quarter to $1120.9 billion. Super funds held 15.1 per cent of assets in cash and deposits, similar to 15.2 per cent held in September and well above the long-term average of 8 per cent.
- Non-equity assets held by Australian companies (non-financial) stood at $652.6 billion at the end of December, a record $100 billion higher than loans. The $552.2 billion held in loans was the lowest in 3-1/2 years. Companies held 30.5 per cent of assets in currency and deposits – the highest share in 11 years.
- The value of listed equities rose by $94.5 billion (5.9 per cent) to $1400.6 billion as at the end of December. The value of currency and deposits rose by $35 billion (2 per cent) to $1599.5 billion
- As at the December quarter, 19.7 per cent of assets were held in listed equities (19.8 per cent long-term average); 20.2 per cent held in bonds (17 per cent average); 22.5 per cent held in cash and deposits (20.5 per cent average). Smaller than normal shares of assets were held by unlisted equities (20.3 per cent, compared with 24.1 per cent average) as well as bills of exchange, accounts receivable, derivatives and one-name paper.
What is the importance of the economic data?
- The Australian Bureau of Statistics releases the Financial Accounts publication each quarter. The data covers assets, liabilities and financial flows for the key sectors of the economy. Figures on financial wealth help reveal the true state of household finances.
What are the implications for interest rates and investors?
- The financial accounts data is essentially backward looking and the Reserve Bank would be well aware that the improvement in wealth over the December quarter would be more muted over the March quarter. Importantly the modest weakness in activity levels, conservative attitudes of consumers and the natural disasters are likely to keep the Reserve Bank on the interest rate sidelines in the near term.
- The Reserve Bank has continuously highlighted the strength of corporate and household balance sheets and the latest result will give the Reserve Bank further confidence that the longer term fundamentals for the economy look sound.
- Super funds and households are still holding much higher than normal levels in cash. CommSec expects that money to be put to work in equities, leading to further gains in share markets in coming quarters. CommSec expects the ASX200 to reach 5200 by December 2011.
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