If you have been fortunate in life and need inspiration on where to invest your loot, you could do worse than look in the mirror.
That’s right. The wealthy have never had it so good, courtesy of low interest rates introduced to stimulate the economy, which have ended up nurturing the value of their portfolios instead.
Mohamed El-Erian, chief executive of bond giant Pimco, confirms the trend: “To the extent that policy activism succeeds in bolstering asset valuations but not the real economy, the rich benefit disproportionately.”
Banks remain stricken, providing the wealthy with an opportunity to become yet more prosperous by lending on lucrative terms. Rising asset values are also giving the wealthy confidence to consume, benefiting the price of luxury goods, prime property and fine art along the way.
According to data from the Merrill Lynch World Wealth Report, high net worth wealth totalled $43 trillion (€32.78 trillion) at the start of 2011, equivalent to 70% of global GDP. This figure represented a growth rate of 9.5%. Wealth in Asia-Pacific grew by 12.1%, the Middle East jumped 12.5% and Africa leaped 13.6%.
Demographics and rising market values suggest the rise will accelerate, as the wealthy leverage off the application of cost-savings through technology and low pay for an oversupply of workers.
The rise will be particularly rapid in the emerging markets following an economic boom nurtured by the low interest rates, which have fanned out from the west.
The system in emerging markets also happens to be tilted in favour of the families who run private companies. As their profits boom, they benefit to a disproportionate extent compared to people lower down the social scale. Other beneficiaries include politicians, who enjoy their lifestyle so much that they use every electoral trick in the book (including not having an election) to stay in power.
The world’s wealthy also tend to be lightly taxed. In emerging markets this is because social welfare spending is low. Rapid economic growth, and commodity sales, limits the extent to which governments need to raise taxes.
In the US, health service spending is huge, largely funded by unsustainable debt. But political gridlock means cuts are impossible. The wealthy individuals who fund the country’s politicians can continue to expect low rates of tax by way of return.
In the UK, Chancellor George Osborne has jeopardised his reputation by cutting tax relief on pasties and charitable donations in an attempt to appease wealthy entrepreneurs with a cut in income tax from 50% to 45%. In France, presidential candidate Francois Hollande has pledged to introduce penal taxes on the rich: few in France believe he will dare.
Small wonder the prices of prime property and art are booming. As far as luxury goods are concerned, few companies are better placed than Johann Rupert’s Richemont, which owns the world’s best collections of jewellery brands. Its shares have risen 150% over three years. Apple, whose high-tech products are predominantly bought by the wealthy and affluent, has the largest market valuation in the world, equivalent to a medium-sized country.
The Julius Baer Luxury Brands fund has performed by owning a more diversified bundle of stocks. Over three years, it has risen by 86% in sterling terms against 59% from the MSCI World index. The Chic fund run by Dominion Fund Management, more diverse again, has risen by 88% over the same period.
Pundits are starting to wonder how much longer the good times will roll. Strategist Marc Faber fears that wealth is doomed to be destroyed by a combination of war and inflation. Wall Street Journal correspondent Robert Frank argues the rich, with their sense of entitlement, are becoming a danger to themselves and the rest of society.
Faber warns: “People of privilege tend to prefer to risk their own destruction than surrender their advantages.” According to independent analyst Andrew Smithers, high executive pay is starting to inhibit the entrepreneurial spirit.
The Middle East has seen revolutions in several countries, courtesy of social inequality. But its governments have been remarkably inept. Most countries are likely to be far better at muddling through, leaving the wealthy to continue consuming.
Even though their ratings are starting to look a little stretched, backing the manufacturers of luxury goods still makes sense. And there could be more mileage in art and property as well, if you have the passion for them.