JPMorgan's Analysis Reveals Impact of Economic Growth on Equity Returns in Developed and Emerging Markets
In a recent analysis, JPMorgan delves into the relationship between economic growth and long-term equity returns in developed markets (DM) and emerging markets (EM). The findings show a clear link between economic growth and equity returns in developed markets, with a 1% increase in long-term real growth associated with roughly 3% higher equity returns on average.
The boost in developed markets comes primarily from higher earnings growth, with additional contributions from increased valuations and currency appreciation. On the other hand, emerging markets present a different story, as the connection between economic growth and equity performance is much weaker. Many EM equity markets are not as closely tied to their domestic economies as those in developed markets.
JPMorgan's research challenges the assumption that faster-growing economies should deliver better stock market returns in emerging markets, highlighting the practical challenges of using economic growth as a predictor for equity returns. Despite the difficulties in forecasting long-term growth accurately, the bank suggests that investors with strong convictions about a particular country’s growth prospects may still consider incorporating these views into their investment strategies.
Overall, JPMorgan's analysis underscores the importance of approaching growth forecasts with caution and being mindful of the broader factors that drive market returns. While economic growth can be a useful indicator in developed markets, it is far from a guaranteed predictor of equity performance, especially in emerging markets. Investors are advised to consider the risks involved and incorporate high conviction views about growth into their asset allocation process.
In conclusion, understanding the impact of economic growth on equity returns in different markets can help investors make informed decisions and navigate the complexities of the financial landscape. By being aware of the nuances and challenges involved in forecasting growth, investors can better position themselves to capitalize on opportunities and manage risks effectively.