While it is not unreasonable for investors to associate rapid economic growth with strong stock market returns, an analysis of long-term investment results tells quite a different story. A study from Vanguard indicates that the average cross-country correlation between long-run GDP growth and long-run stock returns has been effectively zero. This counterintuitive result holds across the major equity markets over the past 100 years, as well as across emerging and developed markets over the past several decades. The study indicates that equity market valuations are arguably the most relevant and useful measure for estimating future long-term market expectations.
The authors conclude that their analysis does not invalidate the strategic case for allocating to emerging markets in a global equity portfolio. However, they caution investors from significantly overweighting emerging markets based solely on the widely held view that emerging economies will grow faster than developed markets. Click here for Vanguard's informative study.