Back to normal in 2024?

2023, a record year for the reallocation of financial investments by French households

2023, a record year for the reallocation of financial investments by French households
The French public’s desire to set money aside – represented by the rebound in savings opportunities noted in the household confidence survey carried out by the French National Institute of Statistics and Economic Studies (INSEE) – remained exceptionally high in December 2023, even though price expectations since April had fallen below the 1987-2022 average. At that time, individuals' perception of the passing of an inflation peak was not sufficiently strong to reduce the household savings rate, whereas price pressures had previously justified its maintenance at a high level owing to a ‘real money balance effect.’ This effect reflects investors’ desire to preserve the real value of their financial assets by offsetting inflationary erosion through increased savings. This behavior led to the savings rate remaining virtually stable at 17.7% in 2023, well above its level of 15% in 2019. 

Paradoxically, the financial investment rate (measured as the difference between deposits and withdrawals on all savings products, as a proportion of gross disposable income), more than halved in 2023 (2% of income) compared with 2022 (5% of income). The correlation sometimes established with the savings rate is consequently insufficient to explain the financial investment rate, which depends not only on the increase in purchasing power but also on the availability of credit, particularly for housing, which automatically frees up resources for financial flows. The downswing in mortgage lending in 2023 put pressure on household budgets, leading to a sharp reduction in financial flows. In practical terms, this budgetary constraint had a number of consequences: a rise in mortgage deposit rates (a trend accentuated when the return on financial assets is less than the cost of credit), a smaller number of older owners selling their properties in order to reinvest in financial assets, and a greater likelihood that existing savings are used to finance renovation work, etc.

Thus, despite the paradoxical maintenance of precautionary savings, we witnessed a collapse in net inflows, excluding interest, from January to November 2023: 13.1 billion euros (excluding securities and cash) compared with a 2018-2019 average of 67.2 billion euros. These very low aggregate flows, however, mask record asset reallocations for a total of approximately 310 billion euros, representing some 9% of the stocks of assets concerned. Almost every asset class experienced either unprecedented inflows (tax-exempt passbook savings accounts, term accounts, even unit-linked life insurance products, etc.) or unprecedented outflows (sight deposits, passbook savings accounts subject to tax deductions, euro-denominated life insurance products, PEL regulated home savings plans, etc.). Inflows were chiefly driven by regulated passbook savings accounts – Livret A passbook savings account (+34.5 billion euros), LDDS sustainable development passbook savings account (+10.3 billion euros), LEP popular passbook savings account (+18.7 billion euros) – triggered by the sharp rise in regulated interest rates and the increase in the investment ceiling on LEP accounts, and by a supply effect on term accounts (+70 billion euros), and even life insurance (+3.4 billion euros, including +28.8 billion euros in unit-linked products). This positive inflow came at the expense of sight deposit accounts (unprecedented contraction of -54 billion euros), B-CSL passbook accounts (-36.7 billion euros) and PEL regulated home savings plans (-32.1 billion euros). Contrary to appearances, life insurance inflows were very dynamic, with premiums up by 9% and unit-linked products accounting for 41% of total sales. However, benefits (outflows) increased by 18%, and by 37% for unit-linked products. The ratio of benefits to assets under management in 2022 stood at over 8.4% in November, approaching – but not reaching – the level of 2012 at the time of the European sovereign debt crisis.

These record levels of reallocations can chiefly be explained by the sharp rise in regulated interest rates in 2023: +100bps for interest paid on the Livret A passbook account, which has been maintained at 3% for the year since February; +140bps for the rate of interest paid on the LEP, which rose to 6% in August, with the ceiling raised from 7,700 euros to 10,000 euros on October 1, etc. The positive effect on tax-exempt passbooks found its negative counterpart in euro-denominated life insurance and sight deposits. Like the PEL home savings plans, sight deposits were chiefly affected by the rise in market rates, as reflected in the offer of unit-linked funds and, above all, term accounts, replacing the traditional market-rate offer via passbook savings accounts subject to tax deductions.

What has this meant for the financial assets of French households over the past 32 years? Outstandings, excluding unlisted shares, have been multiplied by a factor of almost 5 in the space of 33 years (from 902.6 billion euros in 1990 to 4,427.7 billion euros in 2023), while inflation has only been multiplied by a factor of 1.7. We can also note a substantial change in the breakdown of financial assets between 1990 and 2023. The share of life insurance has risen to 42.1% of the total, which is as high as that of on-balance sheet savings (40.4%) in 2023. There has been a steady decline in investments in securities, down to 17.4% in 2023 from 36.2% in 1990, while sight deposit accounts, term accounts and passbook savings accounts have returned to a position virtually equivalent to that of 1990.

Pension savings plans: a vehicle for the democratization of retirement savings 

Preparing for retirement remains one of the principal financial concerns of households: two-thirds of French people say they are worried about the future level of their retirement pensions, and the same proportion consider building up savings for this purpose to be of priority importance. These metrics remain relatively stable over the long term and have hardly been affected either by the recent pension reform or by the so-called Pacte law (action plan for the growth and transformation of businesses) promulgated in 2019. 

On the other hand, however, there has been a radical change in how these retirement savings are allocated. Chiefly oriented towards real estate and life insurance (or passbook savings accounts) until 2019, both individual and collective retirement savings vehicles have now overtaken life insurance in investment intentions. The legibility, universality, fungibility, and simplification of retirement savings have made it possible to overcome the traditional obstacles to the development of this type of investment vehicle, and 28% of working people now hold a retirement savings product, including 19% on an individual basis.
The year 2023 confirmed the success of the PER pension savings plan, demonstrating that its earlier growth had not been driven exclusively by a short-lived ‘announcement effect,’ as was the case with the PERP retirement savings plan. Judging from the data available for the second quarter of 2023 for the market as a whole, the PER is expected to exceed 100 billion euros in outstandings and 10 million policyholders by the end of 2023, compared with the 13.5 million policyholders estimated by the French government’s Directorate for Research, Studies, Evaluation, and Statistics (DREES) for 2019, from the outset and for retirement savings as a whole.

However, the main success of the PER does not lie in these overall figures, which partly reflect transfers between products. In fact, if we look at data excluding transfers for individual retirement savings – which, until now, had been the poor relation of dedicated products – the PER marks a major breakthrough in terms of both net account openings and net fund inflows (after the deduction of benefits). Account openings, which were negative at the end of the 2010s for individual products, have been beating their all-time record since 2020. Net fund inflows, which have also been rising sharply since 2020, are expected to reach 5 to 6 times the average net new fund inflows on PERPs between 2005 and 2019. These record net inflows (excluding transfers) of around 7 billion euros in 2023, in a context where overall investment and life insurance flows are expected to be particularly weak, show that the PER pension savings plan has succeeded in making individual retirement savings a lasting feature of the French financial investment landscape.

2024: back to normal? 

In 2024, against a backdrop of persistently lackluster growth (0.7%, versus 0.8% in 2023), average inflation is expected to fall to 2.4%, thanks to the stabilization of the decline in energy prices and the continued moderation of food price increases, which should buoy up household purchasing power despite the slowdown in employment. Consumption should consequently be more stimulated than last year, while only experiencing relatively moderate growth owing to an insufficient reduction in the savings rate. 
The household savings rate is expected to fall only very moderately to 17.5% in 2024, clearly not returning to the pre-Covid level of 15%. This is due to continuing uncertainties and a prolonged desire on the part of French households to set aside precautionary savings and reconstitute their real assets, faced by the earlier surge in inflation. Asset reorientation in favor of savings is also likely to be guided by the anticipation, by affluent households, of foreseeable tax hikes considering the runaway increase in public spending, and even the anticipation of investments to be made for the energy transition (housing, electric vehicles). What is more, financial income and the reduction in tax and social deductions, whose impact has been more dynamic since 2020, are generally less subject to direct consumption than earned income. 

A reduction in key interest rates from June onwards would be justified a priori by the rapid decline in inflation, the Fed's monetary loosening in spring 2024, and the implicit risk of a pronounced economic slowdown in 2024. In addition, both the US and European central banks are expected to continue the gradual trimming of their balance sheets, with the ECB also announcing the acceleration of this process from July 2024. This should prevent long yields from falling back in line with key interest rates and lower inflation expectations in a context where risk premiums on the sustainability of public debt in certain European countries, such as Italy and France, are likely to increase. As a result, the 10-year OAT is likely to fall only slightly on average over the year, from 3% in 2023 to around 2.8%.

After a year of record reallocations of financial investments, we are likely to see, if not a return to normal, at least a marked slowdown in the reorientation of investments. Although the amount of financial investments (flows excluding the capitalization of interest and stock market valuation) is on the rise, given the slight rebound in purchasing power (1.2%, after 0.9% in 2022), it is still expected that this type of investment will be restricted in 2024 by the decline in the distribution of credit, with outstanding mortgages remaining virtually stagnant. Investment flows should amount to 44.2 billion euros in 2024, after 34.8 billion euros in 2023, compared with 82.4 billion euros in 2022.
We should see an easing in the reorientation of existing investments, chiefly due to the absence of any change in the rate of interest paid on Livret A passbook accounts (no media ‘announcement effect’), apart from changes in the rates of interest paid on the LEP popular passbook savings account (from 6% to 5%) and on PEL regulated home savings plans (2.25% instead of 2%). What is more, lower inflation and, in the second half of the year, lower key interest rates should lead to a smaller outflow from sight deposit accounts and B-CSL passbook savings accounts, as well as lower inflows into tax-free passbook savings accounts. This should lead to a slowdown in term account inflows, owing to less competition for liquidity, the absence of a rise in regulated rates, and a measured decline in short rates in the second half of the year. The appeal of euro funds should be enhanced by a relative improvement in their yields, bringing life insurance inflows to 21.6 billion euros, with unit-linked funds boosted by the PERI individual retirement savings plan. It is possible that the attractiveness of mutual funds, particularly money-market funds, and bonds, will be maintained by a knock-on effect, as the fall in interest rates remains moderate in view of the decline in inflation.