Stock Market Returns – The GDP Growth Rate Myth

Many market participants continuously dole out advice that higher economic growth results in higher investment returns. This tendency persists even though there has been much investment research providing evidence to the contrary.

With the help of some examples and data presented by others, the author shows that investment returns are not directly linked to growth. Instead, investment returns are comprised of various sources including return on capital, reinvestment rate, return on reinvested capital, and valuation delta.

Taking the case of Indian markets, the author shows that the data disproves any suggestion that the GDP growth of India has driven investment returns of equity investors. Indeed, the author shows that investment returns earned by investors declined in the post-liberalization period even though nominal GDP growth rates stayed the course. The author hypothesizes that this decline in investment returns was a result of increased competition driven by economic liberalization which drove the returns on capital of the businesses lower.