Beware The Lure Of GDP When Seeking Stocks In Brics |
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January 12, 2010
Emerging markets used to be known as the markets you couldn't emerge from in an emergency. They are now mainstream. Consultants are recommending greatly increased allocations to take advantage of the hottest growth story of our times. Mutual fund investors are syphoning money from developed markets and pouring it into EM funds - just as 10 years ago they cashed out of "old economy" stocks to chase the dotcoms.
Emerging markets used to be known as the markets you couldn't emerge from in an emergency. They are now mainstream. Consultants are recommending greatly increased allocations to take advantage of the hottest growth story of our times. Mutual fund investors are syphoning money from developed markets and pouring it into EM funds - just as 10 years ago they cashed out of "old economy" stocks to chase the dotcoms.
As always, companies and investment banks have no trouble in meeting the new demand. Emerging market IPOs have been running at double the cash value of developed market IPOs, in spite of the much smaller market scale. What's wrong with this picture? Plenty. Academic studies have shown there is no positive correlation between gross domestic product growth and stock market returns - if anything the correlation is slightly negative. Professor Jay Ritter of the University of Florida is the author of one study that has analysed 100 years of data from 16 countries. His conclusion is clear: "Countries with high-growth potential do not offer good investment opportunities unless valuations are low".
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