EDITOR'S LETTERMerryn Somerset Webb
Money flow drives markets
There isn’t much that can be said with absolute certainty about stockmarkets. But one thing history makes very clear is that there is no positive correlation between the performance of the stockmarket of a country and its GDP growth. Instead, the statistics go so far as to suggest that there might be a negative correlation: markets do better in slower growing economies than in faster growing economies.
Examples of this aren’t hard to find. Look at Japan up until the 1970s. It was growing at a good 10% a year. But its stockmarket – beside a few ups and downs – did very little. The real market boom (and then bubble) in Japan came later – when growth slowed to more like 5%.
The market was cheap. But at the same time, with breakneck growth over, attention turned more to wages, to consumption and to profit generation, while lower investment by companies meant hopes of slightly higher dividends. You can argue (quite rightly) that all these things need a tad more attention now, but markets turn more on change – which drives money flows – than they do on actual success.
This brings me to China, the other classic example of the irrelevance of economic growth to stockmarkets: over the last 30-odd years of super-fast growth, a conventional portfolio of Chinese stocks would have returned you very little. But here’s the interesting thing: that’s changed.
• Read the full editor’s letter here: Money flow drives markets