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The OECD long term growth forecast says emerging markets such as China have 6-8% growth currently.

Meanwhile the MSCI Emerging Markets index doesn't seem to reflect that and indeed seems shows no great increase over its entire history (even including total return).

What is the reason for this disparity?

  • Why do you expect the market to move in lock step to a GDP prediction? – quid Feb 28 '17 at 20:47
  • I don't expect lock step as you put it, but I would expect there to be some correlation between market and GDP growth as there has been with e.g. the FTSE indices. If an economy overall is becoming more productive then why would you not expect a broad spread of investments in that same economy to become more productive? – Sideshow Bob Feb 28 '17 at 20:59
  • Have you looked at the way the indices you cite choose the constituent holdings? This is a somewhat interesting article comparing US GDP growth to S&P500 performance, and bear in mind the S&P500 constituent list methodology is pretty simple,seekingalpha.com/article/… and this is in the US where our data is pretty good, emerging markets sometimes suffer from being a bit overly optimistic with not much real believable data/news. – quid Feb 28 '17 at 21:03
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GDP being a measurement for an economy's growth and with the stock market being driven (mostly) by company profits you would expect a tight correlation between GDP growth and stock market performance. After all, a growing economy should lead to a corresponding increase in profit right?

But the stock market is heavily influenced by investor mentality; irrational exuberant buying and panic selling make the stock market far more volatile than GDP ever can be. Just look at the 2001 bubble and 2008 panic sell-off for famous examples. I feel emerging markets are particularly prone to overly optimistic buying to "get in" on the GDP growth followed by overly pessimistic selling when politics get unfavorable.

Also keep in mind that GDP measurements are all done after the fact, the growth that is reported has already happened. The stock market might have already expected the reported growth and priced it in.

A final point: governments and companies in emerging markets have a reputation (sometimes deserved) of poor governance, think corruption, nepotism etc. So even if the economy grows substantially investors might not believe they can profit from the growth.

P.S. What do you base the "no great increase" on? Emerging markets have had a rough decade but that index would have still returned 9% annually if you held it since 2001.

  • re PS: my bad. I was looking at a chart that showed 11 years, the index turns out to be older than I thought. – Sideshow Bob Mar 1 '17 at 11:01

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