One source of inequality is the wealth divide across the world. Wages have been stagnant while asset prices have been ballooning, resulting in the asset owners (the rich) richer and the working class being left behind. Not only are the working masses not participating in the asset-inflation wealth effect, but they are less able to afford asset accumulation owing to the inflating prices, as demonstrated by the increasing challenges faced by new home buyers.

The Gini index is a statistical measure that represents the income or wealth distribution of a nation. The index ranges from zero to one hundred. A low index value (i.e. zero) represents perfect equality, where everyone has the same income/wealth, and a high index value (i.e. one hundred) represents the maximum inequality (i.e. a small number of people have all the wealth and the others have none). The Gini index tells us a lot about a society. High Gini indexes are normally associated with Kleptocracies (or broken societies), whereas low Gini indexes are often associated with stable countries that have a high standard of living.

The tables below illustrate the Gini indexes for a sample of countries. Countries with high inequality are ranked highly (i.e. South Africa has the highest level of inequality) and countries with high equality have a low rank (i.e. Sweden has a high level of equality). The data demonstrates that Australia is quite an egalitarian society as are many European nations. It also highlights that Hong Kong is highly elitist as is the US. In fact, the US is only marginally more egalitarian than Peru and has higher inequality than Cameroon and Iran! It is no wonder that the US and Hong Kong are tinderboxes for social unrest.

We consider the above findings on the US and HK alarming. In this quarterly commentary we explain examples of how we consider these issues in portfolio management.

It is critical to be asset owners. Low-interest rates appear to be here to stay and there is scant evidence of wage growth. In this environment we think it is important to allocate as much income as possible to income-generating assets, such as stocks. There will be ups and downs from holding these assets, but over the long term the direction has been positive. 

A growing wealth divide can create investment opportunities. For consumer-facing businesses these opportunities lie on the two barbells of consumer consumption. At one end are luxury goods companies like LVMH, Kering (owner of Gucci), Hermes, Apple, Nike, and Adidas. At the other end are discount retailers such as Dollar Tree, Dollar General, B&M European Value Retail. 

The wealth gap is also providing opportunities in less obvious industries. As companies caught in the middle are hollowed out, we anticipate a meaningful increase in corporate bankruptcies. 

The importance of our investment views was laid bare during the quarter. After an initial plunge in the stock market due to the COVID-crisis, central banks stepped in, slashed interest rates and pumped liquidity into global markets, fuelling a breathtaking stock market rally. In this environment it paid to be well invested across a diversified portfolio of conservative stocks.

While the portfolio’s quarterly return was pleasing, it is important to take a long-term perspective. Over the last 5 years, we have witnessed:

• a concentrated growth-company bull market, 
• Brexit, 
• Trump being elected as the US president, 
• US-Sino trade war, 
• impeachments in Brazil, 
• 3 Australian prime ministers, 
• demonetization in India, 
• European debt crisis, 
• Indian elections, 
• Covid-crisis, 
• negative interest rates for the first time in human history, and 
• market swings into cyclicals and then back into growth. 

The list could go on but the key message is we have collectively experienced seemingly inexplicable events.

Maintaining a strong conviction is a challenge for any investment manager, especially during periods of uncertainty and so it is pleasing when an investment philosophy and process has remained consistent. Investors would be well placed to continue to hold highly cash flow generative and growing businesses that have fortress balance sheets, fair valuations, and high ESG standards, diversified across industries, underlying exposures, geographies, and market cap ranges, not relying on binary outcomes.