Stuart R. Gallant, MD, PhD
DiscussingTerms has been thinking about economic growth as economies expand in the post-Covid-19 world. Clearly, some things are the same: people still need homes, durable goods, and food. Other things are changed, perhaps forever: remote work has become more common, and the role of city centers in the economy is being questioned.
In today’s post, DiscussingTerms takes a step back to look at economic metrics and consider what they mean for national economies and for individual investors. This is the first of a 2-part series.
Caveat: DiscussingTerms does not provide formal financial advice, and readers are advised to consult a strategic, legal, or financial advisor prior to making any decision about investing.
Background
Economic development and stock market growth both constitute the outcomes of negotiation processes. In the case of national economic development, gross domestic product (GDP) growth is supported by four types of activities:
- Government and society:
- Reasonable levels of taxation, regulation to support business competition, freedom from corruption
- Maintenance of utilities, highways, ports, and transportation services
- Support of an advanced education system, participation of women in the economy
- Regional diplomacy: Low military spending, absence of military conflict
- Investment: Private sector investment from local investors and/or international investors
- Markets: Engagement in the world economy
In the case of business growth of public and private companies, increased enterprise value is supported by the sensible national policies listed above, as well as by three additional factors:
- Entrepreneurs: A community of business founders and leaders who can develop and execute business strategies to deliver products and services their clients want and to deliver returns to their investors.
- Access to Capital: Banks and investors (international investors, private equity, angel investors, retirement funds, brokers, and individuals) provide the funds for businesses to establish themselves and expand.
- Workers: Businesses need managers, scientists and engineers, financial specialists, regulatory staff, logistics personnel, manufacturing and maintenance staff, and others with the training and experience to allow companies to achieve their strategic goals.
Data on Economic Growth
DiscussingTerms was reviewing the data on stock market growth and comparing it with national GDP growth—some interesting trends popped out [1]. Here is a graphical presentation of the data:
Some points to note about the graph:
- On the vertical axis, appears stock market index growth percent for 24 major stock markets. The specific stock market indices are noted in the table which appears as a note [1].
- On the horizontal axis, appears GDP growth percent for the specific nation in which the stock market is located. For instance, Toronto Stock Exchange is located in Canada and seen on the plot near Switzerland and Saudi Arabia. Most countries have a single stock exchange, but a few have more than one.
- The red diagonal dashed line is the line of equal stock market and GDP growth. So, markets which appear above the line are growing faster than the GDP of their country, and the markets which appear under the line are growing slower than the GDP of their country.
- The two red sold lines are at the 100% growth limits. Economies to the left of the vertical red line (Japan, South Africa, and South Korea) shrank over the last 5 years. Stock markets below the horizontal red line (Hong Kong, Thailand, Philippines, Malaysia, and China (SSE)) lost value over the last 5 years.
One way of thinking about this plot is that stock markets and overall economies do not necessarily move in synchrony. Stock markets which appear above the diagonal dashed line are pulling up overall economic performance, while stock markets appear below the dashed line hold back economic growth.
Stocks Which Promote Growth
Let’s consider some of the stocks that drive growth in markets:
- Nasdaq is an exchange that has had tremendous growth (221%) over the last 5 years. Leading Nasdaq stocks include: Microsoft, Apple, NVIDIA, and Amazon are key stocks in e-commerce and technology with strategies to enter AI and other growth areas of the economy.
- Important companies in both the Bombay and National stock exchanges are: Reliance Industries (a conglomerate with interests in petrochemicals, as well as telecommunications), Tata Consultancy Services (a major IT services company), HDFC Bank (a major Indian bank), and ICICI Bank (another major Indian bank).
These companies are dynamic—seeking to expand and develop new business strategies to allow long term growth. This type of company contrasts with companies that are typically thought of as low growth companies—companies caught in older stagnant areas of the economy, without strategies for competing beyond national borders, engaging in “rent seeking behavior” to maintain revenue.
Middle Class Investment
Wealthy families will always have options for what to do with their capital—including investing overseas. But, middle class families often have fewer options. Let’s contrast two national economies, one with rapid growth in its stock market and one without rapid growth in its stock market. In both cases, middle class families may be able to earn more than their daily requirements for food, lodging, clothing, healthcare, education, and other immediate needs. But, what they do with their surplus capital differs markedly:
In the case of a rapidly growing stock market, a virtuous circle results with middle class investments helping to power economic growth. In the case of a slow growing stock market, assets of middle-class families may be trapped in dodgy low growth investment schemes. Certainly, some investments outside the stock market can provide growth—family businesses undoubtably power dynamic local economies in low and high per capital GDP countries—but, the investment options are significantly narrower.
Conclusions
In countries like the United States, Taiwan, India, Japan, South Africa, Germany, and others, the stock markets are lifting up the overall economy. This is an important dynamic to nurture which governments can encourage through best practices in legislation and regulation, intelligent diplomacy, and economic policy.
[1] Table of stock market data:
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