On The Relationship Between Economic Growth and Stock Market Returns

One of the myths among investors is that economic growth influences the growth of equity markets.However this is not true. Study after study has confirmed that there is no relationship between economic growth and equity markets growth. This is because stocks can rise for a multitude of reasons which have nothing to do with economic growth.

For example, last year among the BRIC countries, equity markets in China and India were among the best performing markets in the world. But their economic growth were relatively muted compared to their previous years. Despite the average growth, stocks rose relentlessly. Various factors such as P/E expansion, investors’ hopes on economic reforms, political changes, flow of foreign portfolio investments into the equity markets, etc. all played a role in the excellent performance of stocks in those markets.

Nick Mustoe, Chief Investment Officer of Invesco Perpetual wrote in an article that in the 2002 book   ‘Triumph of the Optimists’ by  Elroy Dimson, Paul Marsh and Mike Staunton, London Business School showed there exists no relationship between economic growth and stock market returns. The 2014 edition of Credit Suisse Global Returns Yearbook also confirmed this theory as shown in the chart below:

Click to enlarge

_Rental growth_Chart_aw

Source: Credit Suisse Global Returns Yearbook, February 2014 via Global Equities: a long-term investment strategy, 12 November 2014,  Invesco Perpetual

Some investors may prefer to developed Europe as a result of the poor performance of equity markets last year and ongoing sluggish economic growth. They may be missing out on potential investment opportunities. As shown above, stocks can still rise even if economic growth remains anemic and no market has consistently ranked the best market year after after.

Ten stocks from developed Europe are listed below with their current dividend yields for further research:

1.Company: Nordea Bank AB (NRBAY)
Current Dividend Yield: 5.14%
Sector: Banking
Country: Sweden

2.Company:Air Liquide (AIQUY)
Current Dividend Yield: 2.56%
Sector: Chemicals
Country: France

3.Company: Autoliv Inc (ALV)
Current Dividend Yield: 2.04%
Sector: Auto Parts
Country: Sweden

4.Company:SABMiller PLC (SBMRY)
Current Dividend Yield: 0.99%
Country: UK

5.Company:Enel SpA (ENLAY)
Current Dividend Yield: 3.99%
Sector: Integrated Oil
Country: Italy

6.Company: Technip (TKPPY)
Current Dividend Yield: 4.34%
Sector: Energy Equipment & Services
Country: France

7.Company: UBS AG(UBS)
Current Dividend Yield: 1.65%
Sector: Banking
Country: Switzerland

8.Company: Fresenius Medical Care AG & Co (FMS)
Current Dividend Yield: 1.42%
Sector: Health Care Providers & Services
Country: Germany

9.Company: Edp Energias De Portugal SA (EDPFY)
Current Dividend Yield: 6.49%
Sector:  Electric Utilities
Country: Portugal

10.Company: Siemens AG (SIEGY)
Current Dividend Yield: 3.65%
Sector:Industrial Conglomerates
Country: Germany

Note: Dividend yields noted above are as of Dec 31, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long TKPPY

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