Prosperity is about our ability to thrive and flourish and rests on far more than just financial wealth. But there are extremely good reasons for the concept of prosperity being closely associated with the economic advancement of both individuals and countries.

Wealth and income have a very strong connection with many other aspects of wellbeing. Over time and across countries there are strong links between economic success and: better governance; stronger rule of law; lower internal and external conflict; less violence; increased longevity; higher education levels; increased technological change; and lower suicide rates.

These positive developments that are commonly associated with prosperity provide the foundations for more of the same. Emerging prosperity, part of Fix the Future’s social and demographic change megatrend, can create a virtuous circle.

Of all the themes into which Fix the Future has grouped the companies held by the world’s best fund managers, emerging prosperity has perhaps the most direct bearing on the health of businesses. Few things matter to a company more than its potential customers having enough disposable income to spend on their products.

That’s reflected in the more than 1,500 global companies held by these investors whose fortunes we have judged to be tied, to a greater or lesser degree, to rising wealth. These companies span a broad cross-section of industries, each affected by changing spending habits as populations become wealthier.

Changing priorities

The immediate priorities for the poor are food and health. Once these needs are reasonably covered, richer individuals tend to put more of their incomes into education – the key thing that tends to help people to become more prosperous. The percentage of income that better-off people spend on education tends to rise the richer they become.

Spending on entertainment rises broadly in line with wealth, reflected in the 47 stocks from this sector that form part of the emerging prosperity theme. Netflix, the Walt Disney Company and Comcast are among the largest of these.

Rising wealth is also connected more broadly with spending on non-essential items. So it’s no surprise that restaurant and leisure companies, luxury goods businesses and even recreational vehicle manufacturers, such as German caravan maker Knaus Tabbert, feature.

But the sector whose fortunes are most closely tied with rising wealth is financial services, absorbing an ever-increasing proportion of income the richer we are. The banking sector is the single largest within Fix the Future’s emerging prosperity theme, accounting for 383 companies. China Merchants Bank and India’s HDFC Bank are the biggest of these to be held by the elite fund managers tracked by Fix the Future. Asset management is the second largest sector, featuring the likes of US giants Invesco and T Rowe Price, and Britain’s Schroders.

Fix the Future’s definition of emerging prosperity is not limited to the development of poorer nations, but focused more broadly on rising wealth. We will also be examining the downsides of prosperity, such as rising greenhouse gas emissions, resource depletion and the potential for heightened inequality, and what it means for investors.

First the good news…

The good news is that the world keeps getting more prosperous and is reaping all the benefits this brings. According to World Bank data, in the 50 years to 2019, there was a 130% inflation-adjusted increase in global GDP per person. Before the Covid-19 pandemic struck, GDP per capita reached $11,400 globally.

But the picture is incredibly mixed from country to country. While the average person in almost any country in the world is much better off today than they were a half-century ago, there are huge discrepancies in how prosperous they are. At the extremes, the average GDP for a person in Burundi in 2020, at $239 a year, was just 0.14% of the average for a resident of Monaco, at $173,688.

It is easy to focus on the depressing aspects of prosperity gaps between people. But the bigger picture is that fewer and fewer people face the worst hardships. The proportion of people living in extreme poverty, which tends to be classified at under $2 a day, now represents about a tenth of the world compared with over a quarter at the start of the millennium and more than two-fifths in the early 1980s. And less than 1% of people in rich countries experience this kind of extreme deprivation.

…then the bad

Two broad negatives are often linked to increased prosperity. Of the two, only the environmental impact from increased resource use and higher GHG emissions is conclusive. It is vital to break the historical link between rising prosperity, resource depletion and GHG emissions.

At 15.5 tons of carbon dioxide a year, the average emissions per person in the US is more than double the 7.4 tons in China and eight times the 1.9 tons in India. China and India each have populations roughly 4.5 times the size of the US.

Both China and India are rapidly becoming more prosperous and currently have GDPs per capita that are respectively 17% and 3% that of the US, which stands at $63,500. That suggests plenty of room for a prosperity catchup along with the possibility of major environmental consequences.

It is unlikely either China or India will be prepared to slow its growth because the West was quicker to get its carbon footprint per capita to an unsustainable level. So, the best hope for the planet seems to lie in the ability of low-carbon technologies and circular-economy solutions to entice these ascendant countries to leapfrog the dirty-energy, resource-intensive models of rich nations.

Fortunately, the rapid reduction in the cost of renewables along with rampant green innovation means it is not just wishful thinking to hope this may happen. This could prove a boon for green companies.

The less clear-cut negative associated with prosperity relates to instances of heightened inequality. In the US, measured by the Gini coefficient inequality measure, there has been a gradual widening of the gap between the haves and have-nots over recent decades. Many other countries present mixed pictures. Increased inequality can reverse the benefits rising prosperity would otherwise be expected to bring and retard further progress.

The world has become hugely more prosperous over the last couple of centuries with massive benefits to mankind. But as governments slowly try to turn this longstanding trend greener, investors must beware it is unlikely to prove a rising trend lifting all areas of the stock market.

Investors – and the world – will be paying more attention to exactly how we thrive and flourish to avoid benefits that have long been associated with emerging prosperity being undermined.