Does GDP Growth Mean You Should Load Up on Equity?
by Charles Cheng, CFA
As the world recovers from the global pandemic of 2020, economists are revising up growth forecasts, with International Monetary Fund (IMF) expecting the world economy to grow +6% in 2021 and +4.4% in 2022. Growth is expected to be led by the US at 6.4% and China at 8.4%. While countries that either failed to contain the epidemic in the beginning or are slower in their vaccine rollouts should continue to see growth well below pre-pandemic levels, the return to normalcy in many places and government stimulus in the US should provide a boost to global growth and trade. With the media now discussing whether there will be a repeat of the “Roaring 20’s” decade following the 1918 influenza pandemic, does this mean that now is the time to load up on equities? The answer is complicated.
隨著全世界正從2020年的全球疫情中恢復過來，經濟學家們正在上調經濟增長預測。 國際貨幣基金組織（IMF）預計世界經濟分別將在2021年及2022年增長6％與4.4％。 而帶領全球經濟增長的美國以及中國的GDP增長率分別為6.4％及8.4％。 雖然一開始沒有控制住疫情或疫苗推出較慢的國家的經濟增長持續低於疫情前的水平，但世界許多地區逐步恢復正常以及美國政府的刺激措施應該會對全球範圍的貿易和經濟增長起到積極作用。 現在，隨著媒體開始討論是否會重演1918年流感大流行之後的“咆哮的20年代”時的情形，大家都在問，這是否意味著現在是時候進行股票投資了？而答案是很複雜的。
First, the link between GDP growth and equity market performance has not been strong historically. According to studies done at the London Business school and University of Florida, across countries, the correlation between stock returns and per capita GDP growth is actually negative between 1900-2013. If you invested more towards countries with higher current growth rates, it would actually hurt your investment performance. It appears that for high growth countries, stock prices become expensive with expectations of even more growth and then are ultimately disappointed by future developments.
Perfect foresight of which countries will grow faster in the future would help in predicting if they will have better stock market returns, but this information cannot be found in either current growth rates or expert forecasts. The Vanguard Group, a fund management company, found that not only does economic growth hold little value for predicting stock returns, but so do estimates of future GDP growth by economists.
This tells us that expected future growth is usually anticipated by the market. In other words, any surge in growth from the recovery from the pandemic and future economic stimulus is likely already discounted into stock prices. Unless growth ends up surprising beyond what is currently expected, it should not have much impact on stock market returns. The most recent example was the sluggish growth in the recovery following the 2008 financial crisis still resulted in steady and strong stock market performance.
這就告訴我們，GDP未來增長通常已由市場預期。 換句話說，從疫情的恢復和未來經濟刺激中獲得的任何增長跳升都可能已經被預期而反應於股票價格中了。 除非增長最終超出了當前的預期，否則不會對股市收益產生太大影響。 最近的一個例子是，在2008年金融危機之後，復甦的緩慢增長仍然使股市表現穩定而強勁。
Furthermore, it’s possible that strong growth is correctly anticipated but not the consequences of that growth. For example, interest rates can rise faster than expected in reaction to that growth, which would be negative for the market. The reverse is true in that slower growth can result in more accommodative monetary policy for a longer time.
此外，強勁的增長也許會如預期一般出現，而這增長帶來的後果卻不一定。 例如，利率上升可能會比預期的增長快得多，這對市場是不利的。 相反的事實是，放緩的增長可能會導致更長時期的寬鬆貨幣政策— 而對股市有利。
However, we note that the biggest stock market drawdowns and crashes tend to coincide with economic recessions (usually defined by two consecutive quarters of falling GDP growth). A period of prolonged growth does reduce the chances of such an event occurring which should reduce the risk of such a thing occurring in the near term. Learning from past business cycles, the eventual outcome may indeed be an unsustainable build-up of credit in the corporate or household sector that is toppled by high interest rates. But that is something that does not seem likely given the current stage of the recovery.
然而，我們還注意到，最大的股市跌幅和崩盤往往與經濟衰退（通常定義為GDP增長連續兩個季度下降）同時發生。 一段長時期的經濟增長會降低此類事件發生的機會，也應會減少此類事件在短期內發生的風險。 從過去的商業周期中我們看到，最終結果的確可能是高利率將企業或家庭不斷累積的信貸拖垮。 但是，鑑於目前還處於疫情復原階段，這似乎不太可能發生。
Given the difficulty of accurately forecasting the eventual economic outcome, anticipating any second order effects that comes from that future, and then making the correct assessment on the market’s reaction, we believe it’s better to put less emphasis on macroeconomics when making investment decisions. Understanding one’s own investment circumstances while implementing an investment strategy that you can consistently implement regardless of the economic environment will ultimately be of greater value.
***This article reflects the personal views of the author and not any firm’s and should not be viewed as an investment recommendation.***