The gyrations of equity markets around the world have prompted observers to declare that stocks are suddenly divorced from the real economy.
In an op-ed for the Financial Times published Monday, economist Mohamed El-Erian warned against buying assets that have “stunningly decoupled” from reality.
According to Jay Ritter, economist and professor of corporate finances at the University of Florida, the idea that the two were ever correlated long-term is a fallacy. His research examines real stock returns and per capita GDP growth dating back to 1900.
“The surprising pattern is, in the long-run, [the relation between] economic growth on a per capita basis and stock returns — both inflation-adjusted — is essentially zero and it can even be negative,” he said in a phone interview.
Ritter is set to publish a third version of his academic paper Economic Growth and Equity Returns next month.
“China has outstanding economic growth but stock investors have not done great. Mexico has actually been a much better place to invest over the last 30 years,” he said.
Using a very long investment horizon, the country with the best returns over the last 120 years is South Africa. According to Ritter, “it’s something that nobody ever guesses.”
On one end of the spectrum, South African stocks have, on average, a low price-earnings (PE) ratio combined with “very high dividends” – and a faltering economy.
China, on the other hand, has seen strong economic growth over the last three decades yet its stock market participants haven’t benefited accordingly.
“The Chinese economy has grown by a massive amount but a lot of it has been [due to] more companies going public, investors pouring money in and buying new shares. Market cap has gone up but it’s not because the value of existing shares has gone up, it’s because more shares have been issued by more companies,” said Ritter.
In Credit Suisse’s Global Investment Returns Yearbook 2020, which compiled the performance of global equities over the past 120 years, South Africa’s 7.1 per cent annualized real return takes the top spot. Second place goes to the U.S. (6.5 per cent), followed by Australia (6.8 per cent), Sweden (6.0 per cent) and Canada (5.7 per cent).
Countries that haven’t had stock markets for that long aren’t among the contenders in this list, but Ritter sees a familiar pattern even among emerging nations.
“A country’s economic growth is not something that determines stock returns. What matters is current price-earnings ratios and earnings-per-share (EPS) growth. A country can grow rapidly without companies’ EPS growing,” he said.
Key factors that contribute to economic growth include labour force participation, high personal savings rates and technological advances — which don’t necessarily drive corporate profits higher. Ritter’s research finds that technological change alone doesn’t boost a company’s bottom line unless the firm has a lasting monopoly, which is rare.
Government intervention is also a factor, and so is central banks’ stimulus which has kept interest rates low in advanced countries. Monetary policy has disproportionately helped corporate interests.
Additionally, companies that make up the stock market tend to be medium and large-sized, and dominated by a select group of industries (energy, materials, industrials, consumer discretionary, consumer staples, health care, financials, telecommunications, utilities, real estate and technology).
The COVID-19 pandemic has benefited tech firms, Ritter said. And lockdown restrictions were a boon to retailers that remained open and were deemed essential services, like Walmart Inc., while shutting rival businesses out.
“COVID has benefited companies that use technology, and big companies which are publicly traded, whereas a lot of restaurants are local, family-owned,” said Ritter. “My brother has a plumbing business and I don’t know of any plumbing business that’s listed in the stock market in the U.S. or Canada. His business is down 50 per cent from six months ago.”
Another reason equities and the economy are out of sync is the fact that stock markets are forward-looking but digesting data from the recent past, and moving based on performance versus expectations, according to Ritter.
Although U.S. stocks are pricing in an expectation of future profitability, Ritter worries about what may be in store several business cycles from now.
“One thing that I’m concerned about is school closures and the effect on children,” he said. “Both education and social development are being affected and that’s something that will have long-term consequences that doesn’t necessarily show up in profits immediately.”
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
OTTAWA – Finance Minister Chrystia Freeland says the government is making some changes to mortgage rules to help more Canadians to purchase their first home.
She says the changes will come into force in December and better reflect the housing market.
The price cap for insured mortgages will be boosted for the first time since 2012, moving to $1.5 million from $1 million, to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
On Aug. 1 eligibility for the 30-year amortization was changed to include first-time buyers purchasing a newly-built home.
Justice Minister Arif Virani is also releasing drafts for a bill of rights for renters as well as one for homebuyers, both of which the government promised five months ago.
Virani says the government intends to work with provinces to prevent practices like renovictions, where landowners evict tenants and make minimal renovations and then seek higher rents.
The government touts today’s announced measures as the “boldest mortgage reforms in decades,” and it comes after a year of criticism over high housing costs.
The Liberals have been slumping in the polls for months, including among younger adults who say not being able to afford a house is one of their key concerns.
This report by The Canadian Press was first published Sept. 16, 2024.
OTTAWA – Statistics Canada says manufacturing sales rose 1.4 per cent to $71 billion in July, helped by higher sales in the petroleum and coal and chemical product subsectors.
The increase followed a 1.7 per cent decrease in June.
The agency says sales in the petroleum and coal product subsector gained 6.7 per cent to total $8.6 billion in July as most refineries sold more, helped by higher prices and demand.
Chemical product sales rose 5.3 per cent to $5.6 billion in July, boosted by increased sales of pharmaceutical and medicine products.
Sales of wood products fell 4.8 per cent for the month to $2.9 billion, the lowest level since May 2023.
In constant dollar terms, overall manufacturing sales rose 0.9 per cent in July.
This report by The Canadian Press was first published Sept. 16, 2024.
