Why emerging market stock with high economic growth is not as rewarding as developed countries?

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BRIC countries

In 2001, Goldman Sachs (ticker: GS) , in order to promote investment in emerging markets with high economic growth, Jim O’Neill has selected four large emerging countries, Brazil, Russia, India, and China, which are rapidly developing countries, which symbolizes that the global economic strength has grown from the already developed.

The G7 economies are shifting outward. And the English abbreviation of their country was BRIC, and then South Africa was added, and the English abbreviation was changed to BRICS. It has been exactly 20 years since this incident, and everyone can see if this initiative was effective. The economy of these five countries should only be China as Goldman Sachs originally expected!

Jim. Rogers’s journey around the world

After broke up with George Soros and ended the Quantum Fund, Jim Rogers embarked on his journey around the world. Based on this, he also wrote a very popular book “Adventure Capitalist”, which records his and his fiancée’s journey around the world (mainly developing and undeveloped countries). The most important part is that when he visits a country he is optimistic about, he will go to the stock exchange of that country first without saying anything.

Regardless of the stocks, he will first buy all the dozens of stocks that have been listed. Rogers’s move is typically optimistic about developing countries and optimistic that the stock market will rise sharply with economic development in the future including, of course, the Shanghai stock market in China.

The matter is not over yet. He is extremely optimistic about China. However, because of the poor living environment and serious air pollution, he and his family moved to Singapore where he havet his daughter receive Chinese education. There is only one reason — he is extremely optimistic about China’s future.

Khu Peng-lam’s Chinese Adventure

The famous Taiwanese-born Japanese stock market celebrity Khu Peng-lam relied on the money he made in the Japanese stock market. He was optimistic about Deng Xiaoping’s reform and opening up and the rapid economic development in China. He was extremely optimistic about China’s economic development prospects, began his Chinese adventure in the last investment career of his life.

After a few years, China has indeed achieved rapid economic development along the way as he envisioned. Everyone is optimistic about the prospects of doing business. Almost all manufacturers from various countries that can be named have entered China to set up factories and seize the Chinese market. Businessmen also all indeed made money. However, based on Khu Peng-lam’s own years of experience, coupled with in-depth observation and analysis, in his books “Khu Peng-lam on China” and “Khu Peng-lam’s Trip to China is Happy”, he also summarized and denied “The stock markets of emerging countries with high economic growth can also generate higher returns.”

Khu Peng-lam analyzed many reasons in his books. One of the most profound ones I remember is that many funds entered into emerging countries with high economic growth. Later, the proportion of actual investment that made a substantial contribution to the economy was low. If I remember correctly Khu Peng-lam’s estimate is less than 60%. But where did the squandered money go? Possible destinations are:

Corrupt bureaucracy.
Excessive corporate entertainment.
Most of the larger Chinese listed companies are state-owned enterprises with poor operating efficiency.
The Chinese stock market does not adopt the internationally accepted IFRS or GAAP accounting principles, and there is a low probability that financial reports can be trusted.

Stock market performed poor in countries with high economic growth

For example, in the second quarter of 2009, China’s economic growth rate was 7.9%, while the US’s economic growth rate over the same period was negative 1%. The growth rate of developing economies in Asia was 5.2% in 2009, compared with 2.3% in the United States during the same period. But what is surprising is that the rapid economic growth does not guarantee that the country’s stock market investment return rate can have the same performance. What is unbelievable is that the faster the economic development of a country, the worse the performance of the country’s stock market!

According to statistics from 53 countries for decades, Professor Eloy Dimson of the London Business School pointed out that “The rapid changes in technology do not necessarily mean that capital holders can enjoy the benefits, and the same is true of high-speed economic growth. Countries with the highest economic growth have, on the contrary, created the worst stock market returns. “In countries with rapid economic growth, the stock market has an average return of 6%, while the countries with the slowest economic growth have an average stock market return of 12%!

Professor Dimson said that China’s economic growth is fact, not fiction. But the problem is that everyone has paid a more optimistic premium for this. But in theory, investment risks in emerging markets are higher, and valuations should be relatively low! It is impossible for the United States to confiscate listed companies, but similar things are possible in China or Russia. I also wrote a blog post about this. Investors who are interested in this topic can refer to my article “The biggest risk to hold Chinese stocks, taking Alibaba and Tencent as examples“

Rapid economic growth will give birth to new companies that absorb capital, drive up labor costs, and drive down the prices of goods and services. This is good news for workers and consumers; however, it is not good for investors, resulting in lower profits. When a country’s economy grows, the economic pie will become larger – more companies will be listed for public offerings at this time, causing the entire economic pie to become smaller and smaller.

In 2003, Russia’s only listed stock absorbed US$14 million in funds. By 2007, more than a dozen companies had IPOs on the Russian stock market, which had absorbed US$42 billion in total.

Magnetic attraction from developed countries

Why does it cause this phenomenon? Everyone has forgotten one thing. The better companies in emerging and highly-growing countries will not be listed locally, especially the fast-growing private companies, while state-owned enterprises (most of the large enterprises in developing countries are state-owned enterprises) will not be listed locally. May be allowed not to be listed locally.

Have you thought about:

Why are there almost no super-large technology stocks in the two major stock markets in mainland China, Shanghai and Shenzhen?
Why are the few rare technology companies in Taiwan that are not listed on Taiwan stocks, but instead go to the US and Japanese stock markets?
Why does Hong Kong only have a population of 6 million and GDP US$ 346.6 billion (about half of Taiwan, but Taiwan’s population is three times that of Hong Kong!), yet Hong Kong stocks are the world’s second largest stock market in terms of liquidity after US stocks? The size of the stock market is second only to the United States and Shanghai, with 2,200 listed companies, which is more than Taiwan stocks (about 1,700), and the company size is larger than Taiwan stocks on average, because most of the large Chinese companies are listed there , especially technology and great state owned enterprise stocks.
For most outstanding companies, if they can choose, everyone’s first choice for listing is the US stock market, not the local stock market. This is also one of the main reasons why the U.S. stock market is growing better, because it brings together all of the world’s most outstanding companies with growth potential.
The same situation is also reported in Europe. The first choice for a good Central and Eastern European country to list is the United States, followed by the Western European stock market, not the local stock market.

As a result, the growth of listed companies in emerging countries is poor, because the highly-growing unicorns are gone.

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