Does Lower Income Inequality Mean Stocks Perform Better?

James Dennin, Kapitall: There's been a lot of talk about income inequality. Does it have any effect on the stock market? 

One of the key points in President Barack Obama's State of the Union address was income inequality. Recent gains in the stock market have been hugely beneficial to the wealthy, who saw their portfolios grow significantly in 2013. But this hasn't been so good for everyone else, as wages and incomes have stayed pretty flat. 

[Read more from Kapitall: Value and Growth Stocks: Can the Good Times Continue? Rob McIver Thinks So]

Interestingly enough, according to our partners at Hedgeye, income inequality isn't a Democratic or a Republican issue. They blame quantitative easing: something which was initiated by Ben Bernanke under President George Bush. Our question is, do differences in income inequality mean stocks perform better, or worse?

Source: Hedgeye

As the video explains, quantitative easing is basically asset purchasing. And when the government take over purchasing these assets, it keeps their prices high. 

This is good for the wealthy, who see the values of these assets go up. But for everyone else, all you get is inflation. To actually buy the assets, the government needs to print money, which sends the value of currency down. Now, rich people usually only keep a relatively small portion of their assets in cash to get higher returns. 

But as Hedgeye also explains, people lower on the economic ladder don't have a lot of assets. They usually live paycheck to paycheck. And if wages stay the same, but inflation goes up, then those paychecks can buy less and less. 

Voila: rising income inequality. 

In reality it's probably not as neat as that. There are many other factors contributing to the rising income inequality levels we've seen in the US, not the least of which is the fact that our low-skilled workers now have to compete with low-skilled workers all over the world. 

But this still gives us something to think about. We decided to create a list of stocks in countries with high income inequality, and compare them with stocks based in countries with low income inequality, as measured by the Gini Coefficient. The Gini Coefficient is a figure published by the World Bank that looks strictly at a nation's distribution of wealth (but not how much wealth there is in total.) 

We chose four stocks from Scandinavia, which has the lowest income inequality in the world, and three stocks from Hong Kong and South Africa, which have fairly high Gini Coefficients, meaning they have higher rates of income inequality. 

Click on the interactive chart below to view data over time. 

These stocks are based in countries that have low rates of income inequality, indicated by a low number for the Gini Coefficient.

1. Autoliv, Inc. ( ALV): Develops, manufactures, and supplies automotive safety systems to automotive industry. Market cap at $8.41B, most recent closing price at $87.61.

Based in Sweden which has a Gini Coefficient of 25, one of the lowest in the world. 
 

 

2. LM Ericsson Telephone Co. ( ERIC): Provides communications equipment, professional services, and multimedia solutions to mobile and fixed networks operators worldwide. Market cap at $39.77B, most recent closing price at $11.95.

Based in Sweden which has a Gini Coefficient of 25, one of the lowest in the world. 
 

 

3. Statoil ASA ( STO): Engages in the exploration, production, transportation, refining, and marketing of petroleum and petroleum-derived products. Market cap at $76.65B, most recent closing price at $24.08.

Based in Norway which has a Gini Coefficient of 25.8. 
 

 

4. Novo Nordisk A/S ( NVO): Engages in the discovery, development, manufacture, and marketing of pharmaceutical products in Denmark and internationally. Market cap at $102.19B, most recent closing price at $37.37.

Based in Denmark, which has a Gini Coefficient of 24. 
 

 

These stocks are based in countries that have high rates of income inequality, indicated by a high number for the Gini Coefficient.

5. Michael Kors Holdings Ltd. ( KORS): Engages in the design, marketing, distribution, and retailing of branded women's apparel and accessories, and men's apparel. Market cap at $16.37B, most recent closing price at $78.74.

Based in Hong Kong, which has a 53.3 Gini Coefficient. 
 

 

6. Melco Crown Entertainment Ltd. ( MPEL): Engages in the development, ownership, and operation of casino gaming and entertainment resort facilities primarily in Macau. Market cap at $22.39B, most recent closing price at $39.78.

Based in Hong Kong, which has a 53.3 Gini Coeffficient.
 

 

7. AngloGold Ashanti Ltd. ( AU): Engages in the exploration and production of gold. Market cap at $5.52B, most recent closing price at $14.71.

Based in South Africa, which has a 63.1 Gini Coefficient. 

 

 

( List compiled by James Dennin, a Kapitall Writer. Analyst ratings sourced from Zacks Investment Research. Gini Coefficients sourced from The World Bank's Database. All other data sourced from Yahoo! Finance.) 

 

Hedgeye logo small  Video © 2014  Hedgeye Risk Management LLC. The information contained in the video herein is the property of Hedgeye, which reserves all rights thereto. Redistribution of any part of this information is prohibited without the express written consent of Hedgeye. Hedgeye is not responsible for any errors in or omissions to this information, or for any consequences that may result from the use of this information.

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