The growth illusion

When investors pick the countries they want to back, they tend to be guided by economic growth prospects. The faster an economy grows, they reason, the faster corporate profits will grow in the country concerned, and thus the higher the returns investors will achieve.

Alas, this is not the case.

• going back to 1900, there was actually a negative correlation between investment returns and growth in GDP per capita
• no statistical link between one year's GDP growth rate and the next year's investment returns

Why might this be?

• growth countries are like growth stocks; their potential is recognized and the price of their equities is bid up to stratospheric levels.
• a stock market does not precisely represent a country's economy - it excludes unquoted companies and includes the foreign subsidiaries of domestic businesses.
• growth is siphoned off by insiders - executives and the like - at the expense of shareholders.

What does work?

• Over the long run (but not the short), it is valuation.

As we always point out, the past is not an indicator of the future, but these facts do support the Visible Investing principle that you must get a good value for anything you buy - stock, bond, home, TV, or anything else.

Visible Investment Advisors feel it is important for most investors to have international assets in their portfolio, but taking the route most discussed by the gurus on TV and newspapers will (like it always does), be hazardous to your wealth.

Read the entire Economist article