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Why the Rich Can Make You Rich
by J Schipper
Published on this site: March 17th, 2006 - See
more articles from this month
'If you want to share in the riches of America's wealthiest
citizens, it may be an excellent financial policy to buy shares
in the companies that cater to society's upper income tier,
Citigroup Smith Barney suggests.
The brokerage firm gave this advice based on findings showing
that the richest of the rich, who earn an average $302,000
(U.S.) or more per year, take up a disproportionately large
piece of the money pie. Statistics from the 2004 Survey of
Consumer Finances reveal that the richest 10 per cent of Americans
make 43 per cent of earned income and own 57 per cent of U.S.
net worth. By contrast, the poorest 40 per cent make only
10 per cent of the nation's total income.
"The rich are in great shape, financially," Citigroup
analyst Ajay Kapur declared in a recent report, noting that
the net-worth-to-income ratio for the richest 10 per cent
of Americans rose to 8.4 in 2004 from 7.4 in 2001. "Furthermore,
if the rich will be getting even richer in the coming years,
this bodes extremely well for businesses selling to or servicing
the rich, be it for example luxury goods, stocks or private
banks."
To take advantage of this fact, the brokerage firm recommends
to its clients that they invest in shares of companies that
sell luxury items to the rich. For example, France's VMH Moet
Hennessy Louis Vuitton SA, a luxury goods retailer whose lines
include Louis Vuitton, Christian Dior, and Givenchy, is one
of Citigroup's top picks among luxury companies. The other
is Swiss-based Compagnie Financiere Richemont AG, a retailer
of luxury watches, jewelry, and gold and silver writing sets.
The Citigroup report claimed that over the last two decades,
the rich have become the dominant drivers of income, wealth
and high-ticket consumer spending in countries such as America,
Australia, Canada, and the United Kingdom.
A number of factors are behind this trend, including a rising
company profits, the high growth in assets, tax concessions
by market-friendly governments, and improved productivity.
In countries where these conditions prevail, the extremely
wealthy have prospered, the report noted, whereas in nations
such as France, Japan, and the Netherlands, official egalitarianism
has kept the rich from becoming much richer during the same
period. As long as neoconservative policies continue to hold
sway, the world's capitalists will become wealthier yet in
the coming years, as they continue to benefit from globalization
and the
increase in productivity.
Globalization and increased productivity improve the finances
of top corporate executives and the lawyers and bankers who
serve them. Other people in the top income tier are sport
stars such as golf, football, and baseball players, music
and
entertainment icons, and fashion models, designers and celebrity
chefs.
Citigroup concludes that the huge divide between income and
wealth "helps explain some of the conundrums that vex
so many equity investors, such as why high oil prices haven't
slowed the global economy, why consumer confidence might be
low yet consumption remains robust in the U.S., why savings
rates are
low, and why the dollar depreciation hasn't done much for
the U.S. trade deficit." These concerns may vex the average
income earner, but these people are not driving the retail
market for luxury goods.
Although the wealthy are few in actual number, their purchases
amount to a disproportionately large amount of all consumer
spending, Citigroup said. And because this small demographic
group is growing steadily richer, "they are happy to
keep consuming." For example, middle-to-lower income
Americans, who
have a relatively larger share of their assets invested in
their homes, are more influenced by a housing slowdown than
the wealthy, who have a lesser percentage tied up. And since
the wealthy are not influenced by factors such as high oil
prices, weak consumer sentiment, or current account deficits,
the risk
attributed to stocks by equity investors may be overly high,
Citigroup said.
As a result of its findings, Citigroup recommends investors
purchase stocks in a basket of luxury companies, including
Zurich-based private bank Julius Baer & Co. Ltd., jewelry
seller Tiffany & Co., and Porsche AG, which features expensive
sports cars
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