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Explained: How household wealth rose despite Covid-19 impacting incomes

The trend of rise in household wealth, as reported by the latest Credit Suisse report, too can be traced back to the concerted government and central bank actions to mitigate the Covid-19 fallout.

A man stands on top of his house in Chandigarh in April 2020 amid the nationwide lockdown due to Covid-19. (Express Photo: Kamleshwar Singh)

The pandemic and the subsequent lockdown may have had a devastating impact on people’s livelihoods and incomes globally, but there has also been a paradoxical rise in household wealth in India, according to the findings in Credit Suisse Group AG’s 2020 Global Wealth Report released last Thursday. India and China are reported to have seen gains in household wealth in the first half of the year, up 4.4 per cent and 1.6 per cent, respectively.

Globally, household wealth has held up in these six months even as South America suffered badly on this metric due to local currency devaluations, with individual wealth taking a hit across geographies during this period.

There are other global trends that run counter to the generally established norms:

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# A major distortion is that stocks and bonds have moved in tandem during much of the last six months, which does not typically happen.

# Then there is a twist in the otherwise synchronised choreography involving copper and gold prices. Almost always, when one rises, the other tends to fall. So, generally in an economic downturn, while gold typically surges as investors flock to a safe haven investment, copper prices slide as manufacturing and construction slows down. But the Covid-19 pandemic has triggered a surge in both gold and copper that are moving up in tandem.

# Despite the devastation of jobs and employment prospects, savings have gone up across geographies. In the US, seven in 10 American job-losers in the recession would earn more from unemployment-insurance payments than they had done on the job. 📣 Follow Express Explained on Telegram

What explains these trends

There are cogent explanations for some of these observations. For instance, the phenomenon of stocks and bonds moving in tandem and the surging wealth of billionaires can be traced back to broadly the same trigger — the record quantitative easing from central banks. As a result of this unprecedented action by the US Fed and other western central banks, and the force of these monetary interventions, all asset classes are surging. These central bank emergency responses included cutting interest rates to zero and undertaking to buy unlimited amounts of bonds, which has translated into all assets — stocks, bonds and even alternatives — moving up in tandem.

The surge in wealth of the richest Americans is being driven by the sharp bounceback of the US stock market, primarily driven by the unprecedented action by the Fed. Investors have been buying equities, with Big Tech companies and those linked to healthcare — Big Pharma and hospital stocks — among the major beneficiaries. Most of the global rich own stocks in their own companies and others, thereby benefiting from the surge in market valuations.

The trend of rise in household wealth, as reported by the latest Credit Suisse report, too can be traced back to the concerted government and central bank actions to mitigate the Covid-19 fallout.

These monetary interventions have resulted in global wealth rebounding from an initial slump in the first quarter of the year, adding $1 trillion by June after ending 2019 at $399.2 trillion. Anthony Shorrocks, economist and author of the report, said, “Given the damage inflicted by Covid-19 on the global economy, it seems remarkable that household wealth has emerged relatively unscathed. Wealth acts as a form of self-insurance that households can draw upon when times are hard. Initially, the impact of the pandemic was felt mainly via the sharp worldwide decline in equity prices.”

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Household wealth in India is dominated by property and other real assets, although financial assets have grown over time, now forming 22 per cent of gross assets. In 2019, non-financial assets rose by 12.5 per cent compared to 8.6 per cent growth in financial assets. A caveat is that the latest findings are based on provisional household balance sheets for the quarter issued by few countries. Besides Latin American countries, among the major global economies, the United Kingdom has seen the biggest relative erosion of wealth.

On the concerted movement of copper and gold prices, as against the general trend of one rising and the other falling, there are two overlapping triggers. The trigger for gold is predictable: fears of a prolonged downturn as the virus continues to spread and uncertainties over the impending global recovery is forcing investors to flock to the yellow metal as they seek out a safe haven. But, unlike during a typical downturn, when copper prices dip as manufacturing and construction slow, the upturn in copper’s trajectory has one key driver — China.

Hit first by the virus, China is recovering first — having clocked a second successive quarter of growth at nearly 5 per cent during July-September, according to data released Monday. Due to a very strong infrastructure demand recovery in China from the Covid-19 pandemic and the red metal’s fundamental role in electrification, copper prices should remain “very robust” for the foreseeable future, trading company Trafigura’s executive chairman and CEO Jeremy Weir told participants in the virtual FT Commodities Global Summit September 29.

Added to that is another trigger: supply constraints. As copper production is concentrated mostly in South America, supply is short as some mines in Peru and Chile are shut because of the virus, and are only slowly resuming production, according to a Reuters report that quoted Susan Bates of Morgan Stanley. A Chinese recovery augurs well for gold too, given that the country is the biggest consumer of the yellow metal.

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