Why The Rich Can Make You Rich

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.