Economic growth and the stock market don’t always go hand in hand
In 2008, China's economy was less than 5 trillion in dollar terms, the US economy 15 trillion. The eurozone economy was respectively $14 trillion and Japan was just over $5 trillion.
Now, fifteen years later, China's economy has almost quadrupled to $18 trillion. US GDP has nearly doubled. Japan and the eurozone are barely moving.
But whose stock market has performed best?
The immediate answer might be China. After all, that's where the economy has grown the fastest. However, the correct answer is the United States. Well, everyone knows the structural problems with China's economic growth. After all, the country is under the yoke of the Communist Party, which may not be compatible with a thriving stock market. Still, it’s astonishing that even the flatlining stock markets of Japan and Europe have outperformed Chinese stocks over this period.
I looked at the returns of different stock markets using the MSCI (Morgan Stanley Capital International) indices because they have a consistent methodology. Dividends are reinvested back into equities, and the indices are measured in the world's number one currency, the US dollar. Since 2008, the dollar has strengthened against virtually all of the other currencies covered in this post.
Economic growth and the stock market do not always go hand in hand.
The US stock market has undoubtedly been helped by the phenomenal global takeover of tech giants such as Apple and Microsoft, and most recently NVIDIA, but this doesn’t explain the whole trend: Since 2008, the balanced version of the S&P 500 index, in which each stock is equally weighted, has performed as well as the standard version of the index (both have returned +250% without dividends). American dynamism and economic strength are reflected in the stock market's performance.
Somewhat surprisingly, the Japanese stock market has been the darling of investors in recent years. The Nikkei index just reached the peaks of the superbubble of the late 1980s. Measured in dollars, the MSCI Japan Index, with dividends reinvested, surpassed previous bubble peaks years ago. Japanese equities have tripled from the depths of the financial crisis and rocketed +44% from the bottom of the inflation storm of summer of 2022. Although economic growth is not characteristic of the Japanese economy, there are large companies such as Toyota, Sony and Nintendo that are internationally competitive in their own sectors. Japanese companies with unfavorable attitudes towards shareholders and large cash hoards have also been urged to adopt more shareholder-friendly policies that build shareholder value. Among high-profile investors, Warren Buffett has already plunged into Japanese stocks a few years ago.
China is a missed opportunity so far. The country's leading tech giants, Tencent and Alibaba, are worth less than $400 billion combined. That's less than the market value of Tesla, for example (over $500 billion). Chinese stock markets are hovering at around 9x the projected EPS. Without owner-friendly policies and economic reforms, however, it’s difficult to see the country's stock market as a viable investment for the time being. For speculators, the Chinese stock market can still be interesting.
Europe's stock markets are full of gems, such as AI wave rider ASML, obesity drug winner Novo Nordisk, or cognac and fashion lovers' favorite LVMH. But individual success stories have not grown large enough to boost stock market returns.
The Nordic countries have fat welfare states and slow-growing economies (although Finland has virtually no economic growth), and stock market performance has been mixed. The weakening of local currencies also explains why Sweden's "economic success" has been less than meteoric in dollar terms: GDP grew by 14% in dollars between 2008 and 2022, but by as much as 31% if the exchange rate had been in constant currencies.
Measured in dollars, the only Nordic stock market to rank among the best in the world is Denmark. Danish stocks have increased fivefold since 2008. However, the above-mentioned Novo Nordisk already accounts for more than 60% of the Danish stock market's weight in the MSCI index. Denmark is facing a real Nokia-like threat. Like its Finnish counterpart, the Swedish stock market is dominated by industrials and banks, and it has returned only +100% with dividends in 15 years. Even including dividends, the MSCI Finland is still below its level at the beginning of 2008: this weakness is explained by the sinking of Nokia, which sailed with a huge weight.
The US outperformance since the financial crisis has captured investors' attention. This is also reflected in the stock market valuations. But weaker economic growth in other parts of the world doesn't automatically mean that there are no gems to be found in other stock markets. And as we can learn from China, strong economic growth does not always automatically translate into a stock market boom.