High growth country generally have poor stock returns

High growth country

Economic growth and stock return not positively correlated

Developing country (aka high growth country)

A paper published in 2022, “What Matters More for Emerging Markets Investors: Economic Growth or EPS Growth? 2022” shows that: from 1993 to 2019, China’s GDP growth rate ranked first in the world, about 7% per year (after excluding inflation), but the real return of A shares is only about 4% per year.

In the same period, developing countries such as the Philippines, India, Russia, Malaysia, and Thailand…the real annual GDP growth rates were between 2% and 5%, but the stock market returns were similar to or even higher than those in China. For example, Thailand (5.6%), Malaysia (5.3%), and Russia (4.8%).

Developed country

According to the research report “Credit Suisse Global Investment Returns Yearbook. Credit Suisse, 2020“: Statistics of the economic growth rate of the world’s developed countries over the past century (1900-2019) and local stock market returns found that there is no positive correlation between the two. For example, countries with relatively high stock market returns over the past century include Australia (6.8%), the United States (6.5%), and Sweden (6%), but their GDP growth rates are not the highest. On the contrary, in Ireland (3%), Japan (2.8%) and Norway (2.6%), countries with relatively high GDP growth rates during the same period, stock market returns were only between 4% and 5%.

What does Wall Street Journal say?

On October 2, 2024, the Wall Street Journal published an article by Derek Horstmeyer: The title was just “Which Countries Have the Strongest Stock-Market Returns? Guess Again“. For his analysis, he surveyed 34 countries.

What are the facts?

What have been the results of surveys over the past 10 years?

  • Just one of the top seven countries had positive average returns in their stock indexes over the past 10 years. China, the Philippines, Vietnam, Turkey, Indonesia and Malaysia all averaged negative returns while India was the single high-growth country to deliver positive returns.
  • The top quartile of countries in terms of GDP growth experienced an average annualized return of just 0.10% over the past 10 years. The bottom quartile of countries in terms of GDP growth experienced an average annualized return of 3.42% over the past 10 years.
  • The high-growth countries come with increased risk as well. The top quartile of high growth countries averaged an annualized volatility of 24.70% while the bottom quartile of growth countries averaged an annualized volatility of 22.60%.

Possible reasons

He speculated in the article that the possible reasons are as follows:

  • Markets expected these high-growth countries and their companies to grow at even greater rates than they did and because they missed out on matching expectations, their stock markets suffered.
  • These high-growth countries are growing at the expense of the private sector. The country is able to export or grow quickly but the companies that are driving the growth have their earnings taxed or expropriated by the local government.
  • These high-growth countries drove their growth via a weaker currency (either intentionally or not). In other words, a high-growth country drives exports to other countries by having a weak or weakening currency, which can increase GDP but will hurt dollar-denominated returns.

Conclusion

In fact, everything must go back to the symbiotic relationship between listed companies and shareholders — only the net earnings and dividend growth of listed companies are good; so will the share price be good, and the company’s market value will increase.

Going back to the topic of this article, a country’s economic growth needs to be converted into the growth of profits and dividends of the country’s listed companies, and then the stock price will rise. To put it bluntly, this is not a university question.

Note: In developing countries, many profitable, large-scale, and monopolistic companies are state-owned or even unlisted companies. If companies that benefit from economic growth are not listed on the market and shared with the majority of shareholders, it will be difficult for the stock market to reflect the fruits of the country’s economic growth.

High growth country
credit: leonardo.ai

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