Economic growth and equity returns: Not always an obvious relationship

A look at the last 15 years (through Dec. 31, 2011) reveals that the relationship between economic growth and equity returns isn’t as definite as might be expected. China’s economy, for instance, posted an impressive average annual growth rate during the period, but the country’s stock-market returns were not necessarily ahead of those recorded in many other countries. Conversely, Brazil’s economic growth was only moderately higher than that for most developed markets, but its equity markets delivered outsized returns.

There are also some surprises if we look just at developed markets. Japan had the slowest economic growth and the weakest equity market returns, while Canada had the fastest economic growth and the strongest equity market returns. But in the middle of the pack, the relationship is somewhat less definite. France and Germany experienced slower economic growth than the U.K. or the U.S., but provided stronger shareholder returns in U.S. dollar terms.

These results indicate that over the past 15 years, equity investors who put money into countries with higher rates of economic growth were not always rewarded with higher shareholder returns. But would this also be true for investing over a longer time period?

Among the studies that have looked at this question, one ambitious piece of research1 examined data for the time period between 1900 and 2002. The results indicate that higher economic growth was not associated with stronger equity returns. Indeed, the data show that countries with the highest rates of economic growth have historically generated lower returns for equity investors. The article makes three points that can help explain this apparent paradox. First, economic growth has generally resulted from higher savings rates and increasing labor force participation, but it may be difficult for shareholders to derive any direct benefit from these conditions. Second, a substantial proportion of economic growth may be associated with newly created companies, and it is often difficult for conventional investors to gain exposure to these companies (which are typically small and non-public). Third, valuations in high-growth countries may already reflect investors’ expectations of stronger performance, thus undercutting the potential for such investments to deliver above-average returns.

The relationships shown in the chart below, together with the research results noted above, suggest that investors may feel at least slightly wary of asset allocation recommendations that are based on expected rates of economic growth. In our view, most investors will find that a portfolio that is broadly diversified by geography will, by definition, have less exposure to any single market. Consequently, that portfolio may be less vulnerable to drastic swings in performance.

1Jay Ritter, "Economic growth and equity returns," Pacific-Basin Finance Journal, vol. 13 no. 5 (2005).

Economic growth and market returns: 1997-2011

Data: Bloomberg, FactSet, and MSCI; equity market returns are based on respective MSCI country indices (gross returns in U.S. dollars).

Higher economic growth is not always associated with stronger equity returns. Indeed, countries with the highest rates of economic growth (measured in terms of real gross domestic product), have historically generated relatively lower returns for equity investors.

Chart shown is for illustrative purposes only. Past performance does not guarantee future results.

At Delaware Investments, we are organized as a collection of distinct investment teams, each of which implements its own investment process. One feature that unites the teams, however, is a dedication to bottom-up (security by security) fundamental research. The investment decisions made by each team — including those that invest globally or internationally — are predicated on finding what they perceive to be the most attractive companies for a specific strategy, rather than on broader economic trends within a specific country or geographic region.

Tools and solutions

  • Delaware Foundation Funds® provide a thorough approach to diversification, with allocations that span geographic regions, asset classes, and investment styles. As a result, the Funds — which range from a conservative option to a more aggressive, all-equity approach — may be less vulnerable to drastic swings in performance.
  • Delaware Global Value Fund follows a disciplined, research-focused approach to global diversification.
  • Delaware Focus Global Growth Fund invests in equities issued around the world, based on company-by-company research that results in a concentrated, conviction-weighted portfolio.
Your financial advisor can help you determine whether a broad allocation to international equities could complement your overall asset mix.

Any views expressed were current as of August 2012, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager’s current views.

Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.


Investing involves risk, including the possible loss of principal.

A Fund is subject to the same risks as the underlying investment styles in which it invests. The Funds are subject to the risk that all or a majority of the securities in a certain market — such as the stock or bond market — will decline in value because of factors such as adverse political or economic conditions, future expectations, investor confidence, or heavy institutional selling.

Risk controls and asset allocation models do not promise any level of performance or guarantee against loss of principal.

Because the Fund expects to hold a concentrated portfolio of a limited number of securities, the Fund's risk is increased because each investment has a greater effect on the Fund's overall performance.

Investments in small and/or medium-sized companies typically exhibit greater risk and higher volatility than larger, more established companies.

International investments entail risks not ordinarily associated with US investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.

Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.

The Fund may experience portfolio turnover in excess of 100%, which could result in higher transaction costs and tax liability.

Diversification may not protect against market risk.