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State of the consumer: a balance-sheet view

State of the consumer: a balance-sheet view
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First Published: Fri, Dec 05 2008. 12 46 AM IST

Updated: Fri, Dec 05 2008. 12 46 AM IST
We would like to extend our solidarity to fellow Mumbaikars in the wake of last week’s terror attacks. Our hearts go out to residents of our city who have had to live the nightmare that was last week.
With a high savings rate, the Indian consumer is better equipped to withstand the ongoing credit malaise than her western counterpart. More specifically, on dissecting the consumer balance sheet for the world’s biggest economy versus that of the world’s biggest democracy, we conclude that generations of thrift have put Indian consumers in an enviable position.
In the US, according to the Federal Reserve, real estate contributes 30% to the consumer’s assets, while nearly 60% of assets held are financial assets. Roughly one-third of these are direct holdings in capital markets, via bonds, stocks or mutual fund holdings; one-third in indirect holdings—pension plans, corporate benefit plans, tax plans, etc.
As these various kitties come with a mandatory exposure to the capital markets, they have resulted in a structural shift in the balance sheet, skewing it heavily towards riskier stock market investments. Compared with the rest of the world, these sundry plans have also resulted in a widespread ownership of equities among households, making US households the most exposed to stock market vagaries.
Through the 1990s, this arrangement brought prosperity to Americans. With their heightened net worth, this led to further fund flows through direct holdings, in addition to the indirect ones, leading to lower diversification of the balance sheet. However, a concentrated balance sheet has the consumer’s fortunes intricately tied up with falling asset prices during every stock market correction.
With a bulk of its investment in the capital markets, not much is left over for safe investments such as term deposits and treasuries. Most American households have anyway shown an inclination for checking accounts instead of trying to meet statutory minimum balance requirements for savings accounts.
The low savings rate leaves little room for cover during capital market corrections. With a meagre 11% in deposits, there isn’t much the American consumer can do while house prices fall and the stock market sits at levels last seen in the late 1990s. Notwithstanding the fact that the consumptive psyche has only exacerbated the problem.
On the liabilities side, 70% of the debt is mortgages and consumer credit. Net worth has been declining for the past three quarters and with the recent slowdown deeply entrenched, the proverbial tunnel just got longer. The estimated $250 billion in savings for the consumer resulting from a decline in oil prices has been more than offset by an estimated $300 billion decline in net worth.
In the developed world, primarily in the US, followed by the UK and Canada, increases in equities and insurance and pension fund assets, account for almost all of the increase in financial wealth in the 1990s. In contrast, in France, Germany and Italy, holdings of equities are a much smaller share of household financial wealth. Aggregate holdings of these assets have increased much less over the 1990s. For instance, in Germany, most household wealth is in real estate, with only about 40% held as net financial assets.
What is of interest, though, is that bank deposits for all the countries besides the US are much healthier. Also, in the US, growth in net worth has far exceeded growth in disposable income, whereas the two have been running neck and neck in Germany. This also shows how consumptive growth in the US relies on the balance sheet.
Indian consumer
Turning to the Indian consumer’s balance sheet, as per the Reserve Bank of India, around 50% of household assets are in real estate and gold. Investments in deposits are close to 30% while equity market exposure is less than 5%.
While gold is roughly 10-15% of the assets and has hardly been a safe haven, suffice to say it far from encumbers the consumer in any fashion and is hardly a short-term investment. Further support is found in provident fund plans and bank deposits. Bank deposits are a healthy 30% and have been a mainstay through the decades. On the liabilities side, despite the recent credit-fuelled growth in consumption, the average household debt is around 14% of total assets, painting an overall bright picture of the Indian consumer’s health.
As we had mentioned in our previous articles, inflation’s bark has proven worse than its bite globally. As debt-driven nations and consumers alike deleverage and new credit is harder to come by, assets in developed nations are more likely to lose value.
A deteriorating balance sheet makes credit that much more difficult, leading to further asset sales to lower debt leading to a vicious circle. The US consumer not only is heavily under debt but, as stated above, has limited savings to draw on.
In a credit crunch, cash and cash equivalents, and a diversified asset base is what corporates and consumers alike should be holding. While undoubtedly the stock market carnage has wiped out wealth for one and all, a diversified asset base is what keeps one afloat in difficult times.
Rajeshree Varangaonkar and Bharat Indurkar have day jobs with US-based hedge funds. They write every other Thursday. Comments are welcome at feedback@livemint.com
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First Published: Fri, Dec 05 2008. 12 46 AM IST