Archive for the ‘Economics’ Category

The Economist has an interesting commentary about the relationship between countries with high GDP growth and the returns for shareholders. Since corporate profitability is a central driver for economic growth in the first place, one would expect that high GDP growth should be a prerequisite in determining the viability of an investment.

This was not the case when considering 2 testing strategies for 17 countries:

  1. There was a negative correlation between investment returns and growth in GDP per capita
  2. In sorting the economies by growth rate into quintiles (highest to lowest), the fastest growing countries yielded an average 6% return, while the slowest yielded 12%.

The obvious problem with these statistics lie in the year of the study (2005) since the US was still achieving 4-5% GDP growth, and would be considered apart of the “slowest growing quintile”. Perhaps Thailand and North Korea were in the top quintile, but for obvious reasons (political instability, risky currencies) they weren’t great investments.

I do agree with this logic, however:

Why might this be? One likely explanation is that growth countries are like growth stocks; their potential is recognised and the price of their equities is bid up to stratospheric levels.┬áThe second is that a stockmarket does not precisely represent a country’s economy – it excludes unquoted companies and includes the foreign subsidiaries of domestic businesses.

Yes; the first is an issue of valuation (when is it unsustainable for China to have a higher P/E multiple than the US?) while the second is an issue of internal vs. external business growth; would we rather own a US run company with 30% of its exports to emerging markets, or a foreign company with 100% of its sales to consumers in its own country?

IBM, for example, is an American run multinational company which contributes to the GDP growth of many countries overseas – however the tangible returns are realized by the shareholders (who are probably from the US), which explains why the “slowest growing” GDP statistic isn’t very relevant for investing, since the geographical scope of most businesses is very wide.


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