The Economist reports, based on a research done by LBS, the slowest-growing economies had higher return to investment than from the emerging economies. The article implicitly assumes that emerging markets have high growth rates and lagging economies have slow growth rates. This is definitely a unexpected and interesting finding. I was wondering whether it is just the volume of return or rate of return? The explanation is mainly focused on returns from the stock market, which is obviously very immature in the developing countries. One can generate high return from an immature market either by working around regulations or by being a little more smart in comprehending weak financial regulations in countries that are opening up shares of public companies to the public. Or am I missing something here?
Faster economic growth means higher returns for investors. That is a big part of the rationale for investing in emerging markets.
The problem with this argument is that it is not true. Research by the London Business School looked at 17 countries over 108 years. The countries with the slowest-growing economies (as measured by GDP growth over five-year periods) returned 8% a year; the markets in the fastest-growing economies, by contrast, returned just 5% a year.
When a broader group of 53 economies, including many emerging markets, were examined, the tortoises beat the hares by a wider margin—12% to 6-7%. James Montier of Société Générale found that the slowest-growing emerging markets have delivered higher returns than the fastest growers over the past 20 years.
...The booms in India and China will have enormous effects on everything from the wages of unskilled labour to the price of commodities. But the simple equation that more growth equals more profits for investors is simply not borne out by history.
P.S.: Check out the Economist's new website, which looks much more better than the previous one.
