The rise and rise of the global balance sheet

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The rise and rise of the global balance sheet: How productively are we using our wealth? is a fascinating report from the McKinsey Global Institute. It is full of interesting data such as national balance sheets and net worth, how these quantities developed over time and what the assets consist of.

Something that really stood out to me are the nonfinancial corporate sectors from exhibit 20. The headline talks about China’s companies having the most real assets, which is true, but probably partially result of bubble like valuations in land and real estate. The really interesting aspect though is the net worth column. This is the residual between assets and liabilities of companies. In this framework equity, meaning market capitalization counts as a liability (and conversely financial asset of other sectors such as households). So the net worth gives a clue as to how the companies are valued in relation to their assets. It should roughly be equal to 0 for valuations at replacement cost. The US exceptionalism stands out with a negative value of 1 times GDP, meaning US companies are valued far higher than their accounting assets, which goes back to the massive outperformance in US indices the past decade. The opposite is true for Japan, Germany, France and Mexico. Either the market believe the assets to be overvalued or earning not high enough returns in those countries.

A few more interesting facts:

The global balance sheet and net worth more than tripled between 2000 and 2020. Assets grew from $440 trillion, or about 13.2 times GDP, in 2000 to $1,540 trillion in 2020, while net worth grew from $160 trillion to $510 trillion. Average per capita net worth was $66,000, but large variations exist across economies, and even more so across households within an economy. In the countries in our sample, per capita net worth ranged from $46,000 in Mexico to $351,000 in Australia. Net worth ranged from 4.3 times GDP in the United States to 8.2 times GDP in China (Exhibit 2).

Among the ten countries, China accounted for 50 percent of the growth in net worth, or wealth, from 2000 to 2020, followed by the United States, at 22 percent. Japan, which held 31 percent of the ten economies’ wealth in 2000, held just 11 percent in 2020.Within the household sectors of China and the United States, the top 10 percent of households own two-thirds of wealth. In the United States, the amount of the country’s wealth held by the top 10 percent of households grew from 67 percent in 2000 to 71 percent in 2019, while the bottom 50 percent of wealth owners’ share dropped from 1.8 percent in 2000 to 1.5 percent in 2019. In China, the top 10 percent of households owned 48 percent of the nation’s wealth in 2000, and by 2015, those households owned 67 percent. The bottom 50 percent of Chinese households owned 14 percent of wealth in 2000 and 6 percent in 2015.

Net worth at market value began growing significantly faster than GDP in most of the ten countries around 2000, even as real investment continued moving in tandem with GDP. This coincides with a period during which interest rates and rates of return on real estate declined to historic lows. Between 2000 and 2020, net worth compared to GDP was 104 percentage points higher on average than between 1970 and 1999. The largest increase in net worth relative to GDP in 2000 to 2020 was in France, where it rose by 371 percentage points, as real estate prices soared, particularly in the early 2000s.

Net worth in the household sector grew from 4.2 times GDP in 2000 to 5.8 times GDP in 2020, exceeding net worth growth overall. Half of household net worth growth came from rising equity valuations, particularly in China, Sweden, and the United States, with another 40 percent coming from rising housing valuations. Housing values in Australia, Canada, France, and the United Kingdom grew more than one full GDP multiple. Household net worth also grew as a result of rising deposits that filtered through to them on the back of money creation and stimulus measures, but debt in the household sector remained relatively steady relative to GDP.

From 2000 to 2020, financial assets such as equities, bonds, and derivatives grew from 8.5 to 12 times GDP. As asset prices rose, almost $2 in debt and about $4 in total liabilities including debt was created for every $1 in net new investment.