2023: the great upheaval in financial investments

The expectations of French households have become less negative

After a year characterized by a bleaker outlook for households, most indicators monitoring their situation point to a significant improvement in their attitudes, albeit only to the level observed in February 2019 in the throes of the so-called ‘Yellow Vests’ crisis. According to the BPCE-Audirep survey carried out in June 2023, French households’ view of the future, their perception of previous living standards, and their purchasing power projections are all showing signs of improvement. This uptick results, in particular, from changes in how they expect prices to behave in the future – switching from anticipated runaway inflation to greater stability – without, however, imagining that prices are likely to come down. French households, however, widely share the same desire to save, and their ability to do so is showing no sign of weakening, except among the lowest income groups. 

Savings rate expected to remain high

The savings rate has remained at a very high level (18.3% in Q1, after 18.7% in Q4 2022), and the indicators monitoring households’ opportunity and capacity to save remain high, despite the easing of tensions in terms of both inflation and unemployment. 

In the absence of significant gains in purchasing power, the savings rate of French households – which largely explains the anemic growth projected for 2023 (+0.6%) and 2024 (+0.9%) – is consequently expected to decline very moderately to 17.8% in 2023 and 17.6% in 2024, rates that remain well above their pre-Covid average level of 15%. This inertia in savings behavior can be explained by a number of factors: the sharp rise in the savings rate is chiefly the result of behavior adopted by affluent households, whose propensity to consume is lower than average and who are currently adopting a ‘wait and see’ attitude inspired by their anticipation of possible tax increases in light of the upward drift in public spending; on the other hand, inflation – that remains stubbornly high at levels frequently exceeding the return on financial assets – is eroding the real value of these assets and encouraging households to save in order to preserve their purchasing power: the traditional phenomenon of real money balance effects.

The paradoxical decline in financial flows

Despite this persistently high savings rate, we expect to see a marked decline in financial investment flows in 2023 compared to 2022. Unlike in the UK, where there exists a close correlation between these two variables, in France (as in most other continental European countries) savings are devoted to the financing of housing investment as much as, or even more than, they are to financial investments with the availability of credit making it possible to limit this use of savings to self-finance homeownership and to free up resources for financial flows.

When credit is both more difficult to obtain and more expensive, households are more constrained in their ability to invest in financial assets, as observed in Spain between 2011 and 2018 when net investment flows were negative (or negligible in size) against a background of debt reduction where net credit flows remained globally negative during the 2010s. In practice, the constraint on household budgets is being exerted by a number of factors: the rise in the required size of mortgage down-payments, the reduction in net sales made by older homeowners who subsequently reinvest in financial assets, the greater likelihood of homeowners using available savings to finance repairs or improvement work, etc. With new home loan production expected to fall by approximately 30% in 2023 and loan outstandings to grow by less than 2% (compared with 5% to 6% in previous years), the scarcity of credit in France should have a major impact on the reduction of financial flows in 2023 and 2024.

The approach to financial flows adopted by BPCE L'Observatoire consists in assessing the net investment effort on financial assets (sight deposits, passbook savings accounts, regulated home savings plans, term accounts, mutual funds, life insurance, listed securities, etc.) excluding the capitalization of interest and stock market valuation. It is expected that this ‘surplus’ – the excess of deposits over redemptions on each type of investment – will decline by almost 50% (to €45.7 billion, down from €82.4 billion in 2022) attributable to the stagnation, or even the contraction, of purchasing power and above all to the decline in the distribution of loans.

Rising interest rates and allocation of financial flows: reorientation of existing investments

It would appear that the decline in financial flows is concurrent with an increase in asset reallocation. Against this backdrop of rapid and far-reaching changes in both the levels and hierarchy of asset yields, this reorientation is apparently affecting not only new investment flows but also, and to an even greater extent, pre-existing investments, notably sight deposits, passbook savings accounts, regulated home savings plans, and life insurance.

When asked about their sensitivity to rising interest rates, 21% of French people (chiefly the youngest and highest income earners) say they have already switched investment vehicles, and 20% plan to do so in the next six months, mainly shifting their savings from sight deposits into tax-free passbook savings accounts.

The impact of higher regulated interest rates is consequently decisive when trying to explain the structure of investments in 2023. All other things being equal, and judging from the econometric modelling of past behavior, the impact of a 50 basis-point rise in the interest rate paid on Livret A passbook savings accounts – measured in isolation of other factors and, notably, excluding the ‘LEP effect’ (resulting from the significant increase in interest paid on LEP popular savings accounts) – shows that there exists a major risk of generating extremely violent shifts between financial assets without, however, increasing the overall size of the savings market. In theory, this would have an extremely positive impact on the aggregate total of passbook savings accounts (+€12.6 billion), including the Livret A (€8.4 billion) considered more of a savings investment vehicle than the LDDS sustainable development passbook account, as well as on term accounts (€8 billion) instead of the Livret B passbook savings account. Investment reallocations are likely to be more at the expense of life insurance (-€13 billion), notably for euro-denominated products, than at that of sight deposits (-€7.6 billion) or Livret B passbook savings accounts (-€0.9 billion). Concerning more specifically the higher rate of interest paid on LEP popular savings accounts, the rate increase has had a positive impact on the LEP of approximately €1.5 billion for a 50bp increase, with money flowing chiefly from Livret A savings accounts and sight deposits. What is more, the fact of raising the maximum LEP deposit ceiling from €7,700 to €10,000 opens up potential additional inflows of €2.6 billion, assuming that the clientele most attached to this product – namely the 3 million people (out of the 6.9 million LEP holders listed at December 31, 2021 according to the annual report on regulated savings), whose average deposits exceed the €7,700 ceiling (i.e., an average amount of around €9,111) – quickly deposit funds on their LEP up to the new ceiling (€10,000). Finally, LEP inflows are also expected to be bolstered by an increase in new account openings. According to the regulated savings report, it is estimated that the number of people currently holding LEP accounts is less than half of the potential total of 19 million eligible individuals. On the other hand, and contrary to widespread belief, the rise in regulated interest rates has had no impact on consumption nor has it led to an increase in aggregate investment. It has impacted the allocation of investments but not the overall volume of investment flows.

The speed and scale of regulated rate hikes since 2022 have tended to smooth out the impact of earlier increases, which will continue to produce their effects in 2023. Even if Livret A and LDDS rates are held steady at 3% until January 31, 2025, inflows will reach historic levels in 2023 with surpluses of €43.4 billion and €16.8 billion respectively. With the LEP rate set at 6% on August 1 and its ceiling raised to €10,000, net inflows could reach a total of €16.2 billion in 2023, or more than one third of aggregate deposits at the end of 2022.

We consequently expect to see a continuing shift away from the most liquid and readily available assets, such as sight deposits (-€41 billion), and Livret B-CSL passbook savings accounts (-€35 billion), toward investments providing basic protection against inflation thanks, in particular, to the successive increases in regulated rates or to a supply-side remuneration effect linked to rising market rates, notably on term accounts. A form of competition for liquidity could take on a variety of forms, from regulated passbook savings accounts to term accounts, money-market mutual funds and even unit-linked life insurance re-intermediating fixed-income products. In the current state of market supply and levels of remuneration, term accounts and, to a lesser degree, money-market mutual funds and debt securities are expected to capture most of this sensitivity to market rates, with inflows of €52 billion and €16 billion respectively. In addition, new deposits on PEL home savings plans (-€29 billion) are expected to continue their decline, penalized by low yields for all plans opened after August 1, 2016 (1%), the taxation of earned interest and the end of the bonus for new plans (opened after January 1, 2018) despite the – albeit insufficient – increase in its interest rate (2%, i.e. a yield net of tax of less than 1.4%).

In conclusion

These investment forecasts, however, are subject to a number of imponderables: the current scale of reallocations on investment flows and, above all, on existing investment portfolios (with reorientations in the latter case being particularly violent and unusual); significant risks of non-measurable ex-ante supply-side effects on term accounts, or even on bank passbook savings accounts, money-market mutual funds and bonds, not to mention potentially massive openings of LEPs; the nature of investment reallocation behavior and the time it will take for households to adapt to the new interest-rate environment, with rates now being close to or higher than (in the case of the 6% rate paid on LEPs) the 3% remuneration threshold above which households decide more widely to transfer their savings. This complexity also requires us to make assumptions about whether financial institutions will maintain their supply-side strategies, notably for term accounts and fixed-income products via the tax wrapper provided by life insurance, in the way these strategies were seen to play out in early 2023.