How to Profit from Increasing Wealth Disparity and Emerging Markets

Investing in Sotheby's (NYSE: BID  ) provides Foolish investors with exposure to the alternative asset art market, which benefits from rising wealth inequality and emerging markets. The company's expansion into China and other markets positions itself well for emerging market growth, as the art-auction market is very concentrated. Unlike many other luxury items, the art market is unique because supply is limited and costs are not as prone to increased inflation. Investing in Sotheby's could help Foolish investors reach the 1%.

The business
Sotheby's is a global art business whose operations are organized under agency, principal, and finance divisions. The agency segment matches buyers and sellers of authenticated fine art, decorative art, and high-end jewelry through the auction or private sale process. The activities of the principal segment include the sale of artwork that has been purchased opportunistically by Sotheby's. The demand for art is the primary growth driver in Sotheby's business.

The global art market was estimated to be worth $64 billion in 2013, up from $36 billion in 2001, an approximate 80% increase. The international art market is influenced by the strength and stability of the global economy and the financial markets. As to be expected, Sotheby's performed poorly in the recession years, but has come back strong since the world markets have rebounded.

Chinese and other emerging market potential
Over the last five years, the Chinese art market has been the fastest growing art market in the world, reaching $15 billion in 2013. In recent years, Sotheby's has developed its presence in China by deepening relationships with Chinese art collectors in a number of ways:

  • Implementing regional marketing initiatives, such as the publishing of a Hong Kong sales catalog
  • New staff with skills to service Asian clients
  • Expansion of facilities in Hong Kong
  • Establishing Sotheby's Beijing in 2012

Sotheby's is also pursuing opportunities in promising emerging markets such as Russia, the Middle East, South America and India. To date, the company has 90 locations in 40 countries.

Revenue by Country

 

2011

2012

2013

United States

 $319.364 Million

 $338.162 Million

 $352.450 Million

United Kingdom

 $243.032 Million

 $221.716 Million

 $230.304 Million

China

 $156.361 Million

 $108.399 Million

 $153.909 Million

Switzerland

 $36.258 Million

 $41.061 Million

 $41.150 Million

France

 $49.688 Million

 $40.972 Million

 $46.891 Million

Other Countries

 $31.360 Million

 $25.961 Million

 $39.465 Million

Source: SEC 10K Filing

As the table above shows, the exposure to emerging markets is still very low. As the emerging markets benefit from the global capitalist system, demand for Sotheby's services should increase.

Other luxury companies, such as Tiffany & Co. (NYSE: TIF  ) and Signet Jewelers (NYSE: SIG  ) , may not benefit from emerging market GDP increases as much as Sotheby's. Tiffany's sales in America, Asia-Pacific, Japan, Europe, and other emerging markets in percent of total revenue were 48%, 23%, 14%, 12%, and 1%, respectively. Signet currently only has a US and UK division. While there may be room for emerging market sales growth for the jewelers, its costs will rise proportionally as economic activity increases labor costs.

Source: SEC 10K Filing

As the above chart shows, Sotheby's stock outperformed its peer group and S&P global luxury index since financial markets have recovered in recent years. I expect luxury products to continue outperforming the overall market since it is the wealthy class that buy these products, and in the US alone, the wealthiest 1% captured 95% of the post-crisis growth since 2009.

Benefiting from wealth disparity
Sotheby's is unique in the fact that it benefits directly from wealth disparity. A report released by Oxfam in January 2014 discussed rising wealth disparity. Here are a few key points:

  • Almost half of the world's wealth is now owned by just 1% of the population.
  • Seven out of ten people live in countries where economic inequality has increased in the last 30 years.
  • The richest 1% increased their share of income in 24 out of 26 countries for which we have data between 1980 and 2012.

The upper class has also been growing by household worldwide. According to a study performed by Boston Consulting Group in 2011, millionaire households have increased in both number and wealth. Millionaire households owned 39% of global wealth, up from 37% in 2009. The number of millionaire households increased by 12.2% in 2010 alone.

The wealth disparity and increase in millionaire households is important because Sotheby's revenue is highly segmented within the top 1%. This benefits Sotheby's more than other luxury-good sellers due to the limited supply of fine art. Most luxury goods, like Lamborghinis or diamonds, can be manufactured or mined. Unless scientist find a way to bring people back from the dead, a Picasso can no longer be painted.

Foolish takeaway
The company is well positioned to benefit from the realities of wealth disparity and emerging market growth, which makes it a unique case. With the art market growing, buying Sotheby's stock will help Foolish investors fill their mansion with a Van Gogh or Monet.

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