Last Monday we wrote an article about how being a Contrarian in Emerging Markets has payed off since last year. We have also tried to investigate what is the relationship between GDP growth and stock market performance, as the growth economies have performed poorly this year. Apparently, a few experts agree with us. Societe Generale strategist and well-known bear Albert Edwards is back again with his hilarious (but smart) investment opinions.
Eurozone equity markets have suffered badly this year amid the crisis that has engulfed the region. Speaking to clients, they still retain a preference for the rapidly growing emerging markets (EM) against the highly indebted and struggling developed economies. Yet, much to many investors’ surprise, EM, and especially the so-called BRIC equity markets (Brazil, Russia, India and China), have performed even more poorly (see chart below).
Despite recent poor performance investors still seem to favour EM and the BRICs. My good friend and former colleague Peter Tasker came up with an alternative for the widely (over) used BRIC acronym – Bloody Ridiculous Investment Concept.
As my former colleague James Montier always used to point out, investors are suckers for a good story. When you look at the evidence, there is absolutely no correlation between investment returns and economic growth because investors overpay for growth stories and there is no margin for error. In addition, The Economist magazine reports that Paul Marson of Lombard Odier has extended this research to emerging markets. He found no correlation between GDP growth and stock market returns in developing countries over the period 1976-2005. A classic example is China; average nominal GDP growth since 1993 has been 15.6%, the compound stock market return over the same period has been minus 3.3%.
Yet investors persist in the BRIC superior growth fantasy. But it is no different from many of the other investment fantasies I have witnessed over the last 25 years – only to see them end in severe disappointment. If growth does matter to investors, they should be worried that things seem to be slowing sharply in the BRIC universe, most especially in Brazil and India (see chart below).