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The Wealthy Set the Economic Agenda

Contributing Editor, 9 November 2005

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The world is dividing into two blocs, the “Plutonomy” nations, where economic growth is powered and largely consumed by the wealthy few, and...

The world is dividing into two blocs, the “Plutonomy” nations, where economic growth is powered and largely consumed by the wealthy few, and the rest, according to a recent equity strategy study by Citigroup. The study believes that asset allocation should take this into account and buy companies that are benefiting from growing plutonomies. The plutonomies, according to Citigroup, comprise the US, UK and Canada, whereas the rest, comprises the rest of the world. Continental Europe and Japan are not plutonomies, according to the study. A Plutomony is a country controlled increasingly by the wealthy and where there is an ever increasing income inequality. A plutonomy, according to Citigroup global strategist Ajay Kapur, is spurred by capitalist-friendly governments, technology-driven productivity gains, high immigration and strict property rights and patents. Mr Kapur argues the US plutonomy has mushroomed since the early 1980s. In a plutonomy there is no such animal as “the US consumer” or “the UK consumer”, say the study. Instead there are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. The great mass of the “non-rich” account for a surprisingly small bite of the national pie, said the study. Mr Kapur goes on to argue that focusing on the “average” consumer is wrong, because of the overriding influence of the rich in plutonomies. “It is easy to drown in a lake with an average depth of 4 feet, if one steps into its deeper extremes,” said Mr Kapur. Since consumption accounts for 65 per cent of the world economy, and consumer staples and discretionary sectors for 19.8 per cent of the MSCI AC World Index, understanding how the plutonomy impacts on consumption is important for equity market participants, argues Mr Kapur’s analysis. The study goes on to illustrate the importance of the wealthy in plutonomies. Around 1 per cent of households in the US (about 1 million households) accounted for about 20 per cent in overall US income in 2000, which is slightly smaller than the share of income of the bottom 60 per cent of households put together, according to the study. But the imbalance gets even more severe. The top 1 per cent of households also account for 33 per cent of net worth, greater than the bottom 90 per cent of households put together. And the top 1 per cent also account for 40 per cent of financial net worth, more than the bottom 95 per cent of households. Citigroup goes on to say that companies which serve or sell to the rich are likely to be beneficiaries of Plutonomy. And the report shows this effect by looking at the stock performance of companies such as Julius Baer, Bulgari, Burberry, Richemont, Kuoni, and Toll Brothers.

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