The marriage that never was!

The world of investing is a hotbed of beliefs that seem commonsensical at first glance, but that turn out to be too simplistic once the messy real world is factored in.

Now, this is true for most spheres in the modern world, but the difference with investing is that false beliefs in this domain can cost you a LOT of money.

With that in mind, here’s one such “obvious” investing narrative that doesn’t hold up too well in reality:

‘*Strong economic growth means strong equity returns. So if you’re in a country that’s notching up good GDP growth, go ahead and buy stocks with confidence.

Conversely, if you’re in a country with poor GDP growth, there’s little point investing in stocks*’

It turns out that this is a pretty common misconception across markets. The real picture, as captured in the table below, is much less cut-and-dried.

Consider Brazil, for instance: despite only moderate real growth, it has delivered some of the highest real returns for investors over the past 30 years.

The real equity returns in Japan, France, Canada, and the United States have also beaten the real GDP growth rate by a significant margin over the past 30 years.

Conversely, over the same period, China Mainland has yielded low real returns despite its explosive GDP growth.

Similarly, the real equity returns in the Philippines, Malaysia, Korea, Indonesia, and even India have lagged behind the real GDP growth rate.

Why is this so? Well, stock returns depend on earnings growth. Companies that consistently create value for shareholders (above their cost of capital) deliver long-term gains that beat the returns from bonds.

But this happens more rarely than most people believe. In many countries and companies, events outside the control of the people in charge can derail or stop growth.

The takeaway: don't be enamoured by economic growth alone. When investing, focus on a company's earnings and the price you pay for them.

For more actionable insights backed by data and analyses, we invite you to read the latest edition of Netra in its entirety.