GDP and Stock Market Returns

by | May 18, 2017


A common sentiment heard among investors relates to wanting to either (a) invest in stocks located in a particular country high GDP growth or (b) avoid investing in stocks of a country with poor growth.  While this would seem to make sense on the surface, it is flawed reasoning.

It turns out that a country’s GDP growth and the returns of its stock market are negatively correlated.  Here’s a chart of 16 countries from 1900 – 2002:


In the chart above, a country’s stock market returns are in green and its GDP growth per capita is in yellow.  Over the 102 year period of the chart, the correlation between GDP and stock returns was -0.37. This result generally persists over shorter time periods as well. This slight negative correlation means that picking stocks of high growth countries is not a profitable exercise.

How can this be so? Isn’t growth necessary for returns?  Yes.  But what matters is the price you pay for growth, not as much the growth itself. The research papers on this topic find that while its a complex issue with myriad factors, basically, what matters is the valuation of the stocks purchased rather than the country’s growth.  Often the stocks of high growth countries are bid up and stocks of lesser growth countries are a better value.

This result makes sense from a common sense perspective.  If finding high performing stocks were as simple as purchasing those in high growth countries, and avoiding those in lower growth countries then everyone would make out sized returns!

It is difficult to determine which countries will have the best stock returns.  As an example, in 2016 Brazil’s stock market enjoyed a 65% return!  Yet, going into 2016, Brazil’s debt had been downgraded to junk, it had 10% inflation, its president faced impeachment for hiding size of the budget deficit, its finance minister quit after a year on the job and the country’s governing coalition discredited by bribery scandal surrounding major company.  And in 2016 GDP shrank by 3.6%!



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