Where to Invest as Inequality Increases

Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Income inequality is not a common theme among investors, but it is a powerful force and investors should be aware of its effects. The income gini ratio shows how much of a nation's income is controlled by the rich and poor. A gini coefficient of 1 means that one person owns all of the wealth in a nation, while a 0 means total equality. As the chart below shows, America's gini coefficient has been steadily increasing over the past decades as it has become a more unequal nation.  

Empirical studies have found that increasing income inequality increases violent crime rates. As America's income inequality continues to increase the cost of policing the nation will increase and social mobility will continue to decrease. Smart companies and investors will position themselves to thrive in the midst of this gloomy trend. 

Where to Invest

Procter & Gamble (NYSE: PG) inspired many headlines when they announced an hourglass marketing strategy. They decided to place their emphasis on the lower and upper segments of society in order to keep up with their consumers' preference for discount or luxury items. This strategy is very important as it shows that the top executives of PG are making farsighted decisions before the middle class is completely destroyed.

While it make take a number of years for such a strategy to pay off it will help to set PG on a path of growth over the coming decades. Over the past 5 years revenue growth has only been 1.19%, while 5 year EPS growth is at 3.26%. Their total debt to equity ratio of .48 is reasonable, but their P/E ratio of 18.2 shows that investors are willing to pay a premium forward thinking firms. 

Wal-Mart (NYSE: WMT) is another major company that is well positioned to flourish in an unequal America. Their large network of distribution facilities and retail locations throughout the world have given them a huge amount of assets and greatly increased the barriers to entry for any potential competition.

With 5 year revenue growth at 4.18% and 5 year EPS growth at 9.39%, WMT clearly shows its strength. Its ability to use its size to get better deals from suppliers while supporting a more efficient operation allows WMT to provide those lower prices which income constrained consumers look for. With a P/E ratio of 15.1 and total debt to equity ratio of .78 WMT is a dependable company positioned to grow. 

Consumer Staples Select Sect. SPDR (NYSEMKT: XLP) invests in a number of large consumer oriented multinationals. PG is the top holding at 13.6% of assets, while WMT comes in at 8.9% of assets. Costco is another firm that targets price conscious consumers through their buying in bulk deals, so they comprise 3.2% of assets. In a recent study researchers found that increasing the price of cigarettes may decreased the number of smokers among higher income individuals, but not among lower income individuals. Philip Moris is the second largest holding of XLP, at 10.5% of assets.

Where not to Invest

S&P Depository Receipts (NYSEMKT: SPY) is one of the simplest ways to invest some of that extra money that is lying around. If America and the world were a stable environment, then SPY would be one of the simplest and most effective investments. It has 19.0% of assets in IT, 15.1% in financial firms, 12.3% in health care, 11.3% in consumer discretionary, and only 11.0% in consumer staples. This diversification helps to decrease volatility, but it also removes the opportunity for growth. Picking specific companies or specific industries that are aimed at the top or bottom segments of society is a stronger strategy, as it allows investors to place their funds where the market is growing.   

Conclusion

As socially conscious investors, it is important to use our portfolios to support companies that will grow as the world grows. Economic growth and increased productivity are important, but the changing distribution of income is also a significant part of economic understanding. Blindly investing in the broad market may appear to be the easiest and best strategy, but it does not guarantee that your investing dollars are going where the consumers are. By picking companies and industries that are ready to serve the bottom and upper segments of America, your retirement portfolio is less likely to blindsided by increasing inequality. 


MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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