The World Cup of Income Inequality

Income disparity remains significant here in the states

Oftentimes investment theses start with individual stocks or industries, but it can also be useful to zoom out a bit. Broader trends like population growth and income distribution, for instance, can lend powerful clues with regards to where your money might multiply.

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Source: Flickr

A recent paper on “The Future of Worldwide Income Distribution,” for instance, pointed out the correlation between the distribution of capital and consumption. As the study put it:

“Consider two countries with the same average per capita income but at polar extremes of income distribution: one in which most income goes to a spectacularly rich ruler and little to his impoverished subjects, and another in which income is equally distributed. In the first case, the country’s economic growth will be mostly reflected in rising consumption of luxury items; in the second, growth will lead to widely shared gains in the consumption of basic consumer goods and, say, transportation.”

While the example of a “spectacularly rich ruler” may be a bit extreme, the general connection between countries with unequally distributed income and their luxury goods industries is logical.

And when it comes to income inequality, the U.S. is darn near royalty. From 2009 to 2014, the infamous “top 1%” took home almost 60% of total real income growth per family. The recent supposedly bright spot with regards to income inequality in the states was the fact that the rest of us registered real income growth of 3.3% in 2014 — the best rate in 15 years.

Of course, the top 1% still outshine, more than doubling that rate with 10.8% growth.

With that in mind, there’s good reason — especially a few years removed from the recession — to keep an eye on leaders in the luxury market.

Beyond that, despite that disparate reality here in the states, the general consensus of the aforementioned paper is that of a rise tide with regards to income. More specifically, authors Tomas Hellebrandt and Paola Maura “project major increases in the potential pool of consumers worldwide, with the largest net gains in the developing and emerging-market economies.”

Of course, projects of both population growth and increased spending power in emerging markets is hardly a new investment thesis either — but the paper does specifically highlight China, India and Sub-Saharan Africa as places where the trend is expected to be the strongest.

China, for one, will be riding the fastest per capita income growth, but is slated to experience relatively low population growth, for obvious reasons. India and Sub-Saharan Africa, on the other hand, will enjoy the combination of both types of growth in coming years.

When it comes to investing in these countries, though, the concern is that this growth is already built in to many prices. With that in mind, due diligence is required — and it may make more sense to zoom in specific industries, like transportation, that have a higher likelihood of being affected by these population and income mega-trends.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.

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