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Rising inequality could push people towards populism

The rise of inequality is something investors need to watch very closely, one economist says.

“Inequality continues to move in one direction and that’s very important from a market perspective,” says Torsten Slok, Deutsche Bank Securities chief economist. “Because for more countries around the world, it is probably a key root of populism.”

Income inequality has ballooned significantly in the U.S. over the past two decades. The top 10% of American households holds nearly 70% of overall wealth today. That’s compared to 60% in 2000. At the same time, the bottom 50% has lost ground from 3% to holding just 1.3% of overall wealth today.

“Inequality is driven by technology, globalization, education systems,” says Slok. “There is just a whole complex set of issues that drives this and the answers aren’t very simple on either side.” The problem is that it’s open season for anyone who has an answer to solve this problem, he adds.

On Sunday, the populist movement took center stage at the European Parliament elections. Pro-EU parties held onto a majority of seats, but parties like Euroskeptic and other nationalist parties gained considerable ground. EU voter turnout was the highest in twenty years at 50.9%.

Nonetheless, investors had been bracing for a bigger populist gain, and the stock market reaction was muted.

However, Slok says more investors are starting to pay attention to how these themes could play out longer term for those investing in individual companies. “Before you would look at companies from the bottom-up perspective — what is the product they are producing, what is the cash flow, what is the management, what is the pipeline.” Now he says the real issues are the macro issues — are there some clouds” on the horizon and what the consequences could be for demographic and political changes.

Slok says he has met investors who have gone as far as to rank countries according to how populist the governments are. And while they may not use the ranking in a quantified sense directly in their MBA, finance, asset allocation model, they do use it as a sort of “background check.”

Slok says investors are asking themselves, “Do I want to allocate a lot to say a country where you have a higher level of populism than where you have elsewhere?”

Joanna Campione is a producer at Yahoo Finance.

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