Growth and Investment Strategies

Economic growth and investment selection Economic growth is directly connected to investment returns, but this connection is neither simple nor linear. Understanding the nuances of the relationship between growth and returns allows investors to avoid common misconceptions and form more well-grounded expectations.

GDP growth and stock returns: the paradox At first glance, it seems obvious that fast-growing economies should provide higher stock market returns. However, empirical data does not support this intuition. The correlation between GDP growth rate and stock returns at the country level is weak or even negative. There are several explanations for this paradox. GDP growth may be driven by extensive factors (population growth, capital accumulation), which do not increase earnings per share. New companies and dilution of ownership in existing companies “dilute” growth for investors. Fast-growing markets often have high valuations, which reduce future returns. More important than GDP growth itself is the unexpected acceleration of growth. Expected growth is already priced in. Surprises—positive or negative deviations from expectations—move the markets.

Quality growth and secular trends For stocks, earnings per share (EPS) growth is more important than GDP growth. Companies able to increase profits faster than the economy owing to competitive advantages, innovation, industry consolidation, are of particular interest—this is the quality growth strategy. Secular trends—long-term structural changes in the economy—create opportunities for outpaced growth in certain sectors and companies. Examples of secular trends include digitalization and the transition to the digital economy, population aging and increasing demand for healthcare, urbanization in developing countries, the energy transition and decarbonization. Investing in secular trends enables exposure to sustainable structural growth, less dependent on cyclical fluctuations in the economy.

Emerging markets and convergence Emerging markets have historically demonstrated higher GDP growth rates thanks to the convergence effect. However, translating GDP growth into investment returns is not guaranteed and depends on the quality of corporate governance, protection of minority shareholder rights, market liquidity and depth, currency risks. The emerging markets risk premium compensates investors for higher volatility, political risks, corporate governance. Diversification across emerging markets can improve the portfolio’s risk/return profile.

Real assets and growth Real assets—real estate, infrastructure, natural resources—have particular relationships with economic growth. Demand for real estate grows with population and incomes. Infrastructure is both a factor and a beneficiary of growth. Demand for commodities is determined by industrial growth. Infrastructure investments are especially attractive in developing countries with an infrastructure deficit. Public-private partnership, concessions, and listed infrastructure companies offer access to this theme.

Private equity and growth Private equity allows exposure to company growth before their public listing. Venture capital funds innovative startups, growth equity—fast-growing companies at later stages, buyout—mature companies with potential for improvement. PE provides access to segments of the economy inaccessible through public markets. The illiquidity premium compensates for limited liquidity and long investment horizons.

Practical recommendations For long-term strategic allocation, growth factors—demographics, institutions, innovation—are more informative than the current pace of GDP growth. Countries with favorable fundamental characteristics have better long-term prospects. For tactical allocation, growth surprises relative to expectations are more important. Acceleration of growth above consensus is positive for stocks; slowdowns below expectations are negative. Diversification by country and region with different growth characteristics improves the risk/return profile. Developed markets provide stability, emerging markets—growth potential.