nottheaverageactuary

Actuarial news and views from Cape Town and beyond

Equity returns and GDP growth

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Equity is an important component in investment portfolios and is often considered as being a winning asset class. A well known characteristic of equities is that its growth closely linked to the growth in GDP (or so it seems). Thus, we expect better investment returns from countries with higher economic growth. This is an important indicator for investors as it means that decisions can be made based on economic growth.

However, an analysis done by the London Business School in collaboration with credit Suisse suggests otherwise. The data suggests that the correlation between the growth in GDP per capita and the country’s stock market has been negative since 1900. This might seem to be odd as it goes against our expectation but the negative relation can be attributed to several reasons which is discussed by Matthew Boesler. One major explanation was that stock prices captures anticipated business conditions.

One should also bear in mind that GDP per capita is affected by population movements and thus changes cannot be solely linked to economic activities. The economist takes Ireland as an example where the growth in GDP per capita can be explained due to emigration which is slowing down the population growth rate. Linking performance of equity asset class to population growth, the article suggests that investments perform better in an environment where the population is rising and pushing up GDP than when growth alone is pushing up GDP.

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