The Bundesbank’s latest Monthly Report finds that German households’ real returns have recovered of late, identifying a somewhat better showing than in the previous year. The Bank calculates that the real total return on households’ financial assets recovered strongly at the beginning of 2019, leaving it at the only marginally negative rate of -0.1% at last count. This is mainly down to rising securities prices, the Bank explains. Total return in the previous year had been well below zero, receding over the course of 2018 from a positive 1.2% (at the end of 2017) to finish the year at roughly -2.5%.

By comparing the total income generated by a financial asset with the amount of money invested in it, it is possible to calculate that asset’s return, which is typically expressed as a percentage. Furthermore, it makes sense to consider returns in real terms, as the purchasing power of nominal returns fluctuates in line with inflation. In the Monthly Report, therefore, the Bundesbank’s economists investigated how real returns on the main types of financial asset held in the portfolios of households in Germany evolved between 1991 and the first quarter of 2019. They approached this topic by dividing the financial assets into different categories: currency and bank deposits, shares, debt securities, investment fund shares, and claims on insurance corporations. Unlike bank deposits, whose sole source of income is interest payments, the revenue generated by the other types of financial asset is influenced to a large degree by price effects. Shares and investment funds that invest in equities commonly pay out dividends, too. Any attempt to calculate households’ real total portfolio return, as it is known, thus needs to consider not just interest payments but these other components as well. The final step in calculating the total return is to weight the returns on the various types of financial asset with their respective share of the total portfolio.

Low interest rates depressing return

Bank deposits and currency traditionally account for a significant share of households’ financial assets in Germany – indeed, they currently represent roughly 40%, or the bulk, of these financial assets. Yet for much of the past few years, such assets have generally been yielding just a low real return that was relatively immune to volatility, the Bundesbank’s experts write. While there have also been instances in the past when the real return on these financial assets dropped below zero, they observe that “ever since mid-2016 it has been mired deep in the red for quite some time now”. Returns have evolved in this manner, they reason, because of the combined impact of historically low nominal interest rates and positive rates of inflation in recent years. The Bank’s economists identify a similar situation for debt securities, whose real return over the past few years has likewise been almost consistently negative in real terms. This, they write, is partially due to the asset purchase programme, which has driven down nominal returns due to the Eurosystem’s purchases of government and corporate bonds.

Search for yield not a major priority

The real return on insurance claims, meanwhile, bounced back noticeably in the first quarter of 2019, primarily on the back of a decline in the rate of inflation. This is because the real return is roughly equal to the difference between the nominal return and the inflation rate. That is to say, if the nominal return remains largely static – as it did recently for insurance claims – and inflation contracts, the real return will increase. The first quarter also saw returns recover on shares and investment fund shares, putting a stop to the trend decline they had been charting since the beginning of 2017. This improved performance was mainly propelled by rising prices in capital markets. One likely reason for the upbeat equity market performance in early 2019 was the brief uptick in confidence at that time that it would be possible to at least partially resolve the global trade disputes.

The Bank’s experts also note that the composition of the financial assets portfolio has seen little change over the past few years – in other words, households in Germany tend to shift their financial assets from one type of investment to another rather infrequently. “This corroborates the observation that the search for yield is not a major priority for households as a whole,” the experts write, seeing this more as an indication that households prefer liquid investments and forms of investment that are perceived to be low in risk.