Do fast growing economies provide better investor returns?

The Emerging Markets index has gained 45% so far this year, versus 9% for the U.S., and investors have noticed, pouring $10.6 billion into emerging-markets mutual funds so far this year, more than 34 times the total they added to U.S. stock funds.

Based on decades of data from 53 countries, studies have found that the economies with the highest growth produce the lowest stock returns, by an immense margin.

Stocks in countries with the highest economic growth have earned an annual average return of 6%; those in the slowest-growing nations have gained an average of 12% annually.

If you think about this, it's not surpiring after all. In stock markets, value depends on both quality and price. Economic growth is high, but stock valuations are even higher, eve though they should be much cheaper than U.S. stocks, because they are far riskier.

High growth draws out new companies that absorb capital, bid up the cost of labor and drive down the prices of goods and services. That is good news for local workers and global consumers, but it is ultimately bad news for investors.

The role of emerging markets is to provide diversification, not to add to returns. Like all performance chasing, this latest investing binge is doomed to disappoint the people who don't understand what they are doing.

Note: history should not be used to predict future returns.