Von Aldo

Equity Performance Is Lead Indicator to GDP Growth

Jim O’Neill, chairman of Goldman Sachs Asset Management, rebuts the argument that euqity market performance is not correlated to GDP growth over the long term. O'Neill says:

• In theory, equity market performance should be linked to economic growth.

• In practice, however, various studies claim that there has been no correlation between GDP growth and equity returns over longer time spans.

• We argue that there are significant methodological and conceptual issues with looking at such correlations for a cross-section of countries over time and…

• …more importantly, the concept of forward-looking expectations is entirely ignored.

• We find that equity markets are a lead indicator of GDP growth and react strongly to expectations about the future.

• In general, the sensitivity of equity prices to future growth forecast revisions appears to be higher in the Growth Markets than in the advanced world.

• Recognising that equity markets price in future growth places a renewed emphasis on valuation, in addition to growth expectations and growth sustainability.

• Some current and prospective Growth Markets still have the potential for higher and more sustainable growth and upside growth surprises that are not yet reflected in equity valuations.

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