We’ve said it before, but we will say it again: Economic growth does not necessarily translate to a good stock market. China’s economy has grown strongly over the last few years and although the rate of growth has slowed recently, it has far outperformed the US.
Yet, the Shanghai Composite, China’s headline stock market index, is down 32% from a high it hit in November 2010. That’s the worst drop among the 21 developing country markets followed by Bloomberg. This period of time also marks the young index’s longest bear market. For comparison, the US Standard & Poor’s 500 is up almost 18% in the same time frame, and if dividends are counted, it’s far more than that.
Valuation has a bigger impact on stock returns than economic growth. Chinese stocks have been expensive. US stocks were cheap, and are still cheap.
Want to guess at what the Financial Times index of 100 largest European stocks has done over the same time frame? Ok, it’s not as positive as the US, but it is positive: a price return of +2.4%, and dividends would boost that. The Euro-mess hasn’t resulted in a bear market – yet. Just goes to show – the tortoise wins more often than we think.