Will Falling Income Inequality Lead To A Bear Market?
Cam Hui | Nov 19, 2014 12:10AM ET
Gavyn Davies wrote a fascinating Business Insider ). The highest levels of inequality exists in EM countries in Africa and Latin America. Of the developed economies, northern Europe had the lowest level of inequality, while American inequality is roughly equivalent to the levels found in China and Turkey.
If the investment thesis outlined by Davies is correct, it brings up a number of interesting questions:
- What would it take for the suppliers of labor to regain more bargaining power?
- If labor compensation were to rise, which would result in falling inequality, does that mean necessarily mean that the returns to capital would have to fall?
The best of both worlds? I would contend that 1) Inequality is being lessened now; and 2) Falling inequality does not necessarily mean lower returns to capital.
In a recent post (see How inequality may evolve over the next decade), I outlined research by facing its Lewis turning point and the low hanging fruit from globalization is gone. There are no Chinas in the world with a similar population size that could cause the same kind of disruptive change to the global economy.
As I pointed out in my previous post, the decision to offshore is no longer a no-brainer for multi-national companies. In fact, China is no longer the low-cost supplier of labor and onshoring is becoming a viable possibility for many companies.
Now consider the following scenario for the coming decade. Onshoring becomes a trend as the economics of offshoring jobs to low-cost countries becomes less attractive. The suppliers of labor in the developed economies then gain more bargaining power because of increased demand. Developed market economic growth improves because of higher propensity of the DM middle class to spend.
In a Piketty framework, the owners of capital lose ground. I would contend, however, that the Piketty framework is overly narrow in that it only analyzes local (within country) inequality without paying attention to how global inequality evolves. Under the scenario that I outlined, the relative winners of the onshoring drive would be the DM middle class, the relative losers the EM middle class. But since the owners of capital directed the re-allocation of capital from one region to another, it is hard to believe that they would lose ground on a relative basis.
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In effect, I would expect an American (and developed market) Renaissance over the next decade, where middle class incomes grow again but without significant impairment of returns to capital.
Disclosure: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
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