Inequalities

It is rare for a book about the economy – and one written by a French person no less- to be listed as a best seller on AMAZON. This is nevertheless the case of the book by Thomas Piketty: “Capital in the 21st Century”. The publication of the work in the US has created unexpected hype: whereas the Wall-Street Journal criticises the book, the Nobel prize winner for economy, Paul Krugman considers it as major progress: “Piketty has transformed our economic discourse; we’ll never talk about wealth and inequality the same way we used to”. In a nutshell, the book does not leave us indifferent and as the crowning glory, its author was recently invited to the White House.

From the “old” Gini coefficient(1) to the finer measures of today, there is a consensus: inequalities are widening at a huge pace. In the US where the trend is developing particularly rapidly, whereas the average income of the richest 10% of the population was around six times higher than that of the remaining 90% during the 1990s, this ratio has just crossed the threshold of eight times(2). As far as the instantaneous wealth effect is concerned, this is even more spectacular, with the wealthiest 1% of Americans now owning 43% of the country’s financial assets and 35% of overall assets.

Thomas Piketty sees in the differences between the growth rate in production and that of financial assets, one of the essential causes behind the acceleration in inequality. However, concerning this last point, the consensus is far from clear. Rather than risk losing ourselves in the vast theme of why the inequality gap has widened, let us focus on the consequences of this trend for our business of investors.

Intuitively, the acceleration in inequalities favours luxury, and in general, stocks focused on the richest consumers. From LVMH (+11% a year over 10 years on average) to HERMES (+19% a year on average over the past 10 years), stockmarket growth figures confirm this fact. Fine-tuning this observation, GOLDMAN SACHS has just published a report(2) not only focusing on stocks of this type but also on those geared towards the most modest consumers (companies such as FAMILY DOLLAR and DOLLAR GENERAL).

Creating two indices, one entitled “rich”, made up of companies focused on the wealthiest customer segment (TIFFANY’S, WHOLEFOOD etc.) and one entitled “poor” (weighted towards the least well-off: companies such as FAMILY DOLLAR which sell goods at very low prices), the report comes to two conclusions. The first can be expected: the “rich” index outperforms the US equities market. The second, however, is more surprising since the “rich” index (+80% over 2006-2013) is soundly defeated by the “poor” index, which rocketed 290% over the same period!

Somewhat cynically, we can deduce from this that companies have been intelligent enough to catch onto this tendency towards inequality, irrespective of its enriching or impoverishing nature. The outperformance of these indices is also a reminder of the principle derived from the forces of Porter,(3) which we can simplify by recommending the purchase of companies interested in extremities and how to build a clear leadership therein. In all, either HERMES or H&M but nothing in the middle…

(1) Coefficient of Gini: a measure of the dispersion of wealth ranging from O (perfect equality) to 1 (total inequality)
(2) Report “Fortnightly thoughts unequal income, unequal implications”
(3) Porter five forces analysis: 5 forces that determine the competitive intensity of an industry