In the picture – There is no long-term relationship between GDP growth and future returns
As we have discussed before in articles such as Gross misconduct, few things seem able to excite investors and other market-watchers like a new set of GDP figures and yet, if GDP growth had any long-term bearing at all on future returns, you would be able to discern some sort of pattern in the chart below. As you can plainly see, however, the data is all over the place.
The chart shows you what your average annual total return from US equities would have been over the five years that followed average real GDP growth being at any particular level since 1950. So, while a picture is supposed to be worth a thousand words, this one equates to just a dozen or so very clear ones: “There is no long-term relationship between GDP growth and future returns.”
The only pattern you might be able to see, in fact – granted, you may have to squint a little – is a vague approximation of a map of the world. Even then, however, in the geo-economic coincidence stakes the chart loses out to the following classic of its kind, where plotting the inflation and unemployment rates of Japan between 1980 and 2005 against each other actually ends up resembling a map of the country.
But we digress. The crucial point here is that people can expend a great deal of time, energy and very possibly even brainpower fretting over the relationship between GDP growth and future returns and yet, if you are a long-term investor – as most long-only investors are, or at least purport to be – there are more productive ways to use all those resources.
Or as we put it in Greatly Dubious Premise III: “Ultimately, the chances of guessing the correct values for all the variables within GDP, guessing them consistently over time, and then turning this into a consistent market-beating investment proposition are all but nil so, here on The Value Perspective, we do not even try. Instead, we focus our time on achieving a profound understanding of valuations and on the significant insight and investment edge we can gain from that effort.”
Fund Manager, Equity Value
I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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