Jeremy Grantham: GDP Growth and Stock Returns

Jeremy Grantham GDP growth Versus market returns

Jeremy Grantham of GMO is out with his latest white paper. There is a belief that countries with higher GDP growth also provide better returns. This has been proven false over and over, but Grantham gives further data here to drive home the point. Below is a brief excerpt from the paper titled ‘Investing in a Low-Growth World’, followed by the full document embedded in scribd:

GDP growth by country along with their market returns. This is shown for the last 30 years only and for developed countries only, but in earlier work (which can be found on our website1) we went back a hundred years for some developed countries and looked at emerging country equity markets as well and all had the same negative correlations. When I asked my colleague Ben Inker if this was for the same reason that growth companies underperform – that they are overpriced – Ben came up with another completely sufficient explanation (in about 10 seconds): the faster-growing countries, at least for the last 30 years, have simply had more slowly-growing earnings per share. This is shown in Exhibit 2. For the record, there is also: a) a moderate relationship between higher-priced countries (on Shiller P/E and price/book) and future underperformance; and b) a tendency for more rapidly-growing countries to be overpriced. Therefore we can deduce a logically appealing (but statistically weak) tendency for overvaluation to contribute a second reason for the market underperformance of more rapidly growing countries. (Please notice how carefully said that is.)

GMO Investing in a Low-Growth World and We Have Met the Enemy, and He Is Us
Jeremy Grantham and Ben Inker