For many investors, buying foreign stocks allows them to diversify by spreading out their risk, in addition to giving them exposure to the growth of other economies. Many financial advisors consider foreign stocks a healthy addition to an investment portfolio. But is the above true of all economies?
We did a comparison to see how GDP growth rates compared to each country’s equity index. Nominal GDP growth is calculated as Inflation + GDP against the performance of the major equity indices.
The below chart depicts the country wise ratios for the past 20 years.
India’s GDP grew at a 16% nominal rate for the past 20 years and the SENSEX mimicked the same. In the US as well, the broader Index S&P 500 tracked and mimicked the growth of the nominal GDP.
However, In China, while the nominal GDP growth was 16.1%, the Shanghai equity index grew at only 4%.
In Europe, the UK & France equities are unable to grow even at the nominal GDP rate.
The below chart depicts the past 20-year GDP growth of India, the US and other key countries.
It clearly shows a secular growth trend for the Indian GDP growth.
Meanwhile, with regard to UK, Germany and France – Their current GDP numbers are at the same levels as of 10 years back … What? No growth in the past 10 years? The EU, as a whole, is the second wealthiest and second largest economy in the world, below the US by only about $5 trillion.
The GDP growth in US is slow but remember that is on a very large base.
GDP level of Brazil has plummeted massively, while Japan has stagnated more than dropped.
As per the below charts, India’s growth is secular, while the European equity markets (UK, France) are trading at their respective year 2007 levels.
Chinese equities are trading at their 2007 levels (13 year low).
Equity markets in USA, Germany are witnessing growth along with Japan. However, the Japanese indices are still below their 1990 lifetime high.
In the US – The XIRR return of the S&P 500 is 7.3% & the NASDAQ 100 is 12.4% XIRR.
GDP vs Equity markets in India and China.Since 2001, the Chinese economy grew 13X ($1.3 trillion to $17.45 trillion), while the Indian economy only grew 6X ($0.49 trillion to $3 trillion). However, Indian equity markets returned 21X in the same period while the Chinese market has just doubled.
Conclusion
Overall,when it comes to allocation to international equities, the US markets alone provide a better risk-reward, stable and transparent investment climate along with growth. Other advanced economies in Europe are languishing for growth.
When it comes to China, we will not be able to invest due to restrictions on investments by foreigners. Furthermore, Chinese equities have not created wealth. Hence,investment in India ensures the growth and with regard to geographical diversification, US equities are sufficient. Just for the sake of diversification to international equities, it is not beneficial to invest in countries which are not growing.
We urge you to have conversations with financial advisors who have seen and navigated these cyclical rises and falls. They are in the best objective position to help you understand and mitigate the risks of letting emotion get the better of you.
We urge you to have conversations with financial advisors who have seen and navigated these cyclical rises and falls. They are in the best objective position to help you understand and mitigate the risks of letting emotion get the better of you.
We can help you understand how to maximise your investment goals or leave a comment below on your thoughts.
