Investing in a country because you expect it to have strong GDP growth in the long term is a bad idea – even if your prediction is an accurate one. That’s according to an article in the latest quarterly report from global investment management firm GMO LLC.
Specifically, the article pointed out that in the 30 years from 1980-2010, developed countries that actually had the fastest GDP growth had a slight tendency to under perform those that had the slowest growth and this same pattern held true for emerging markets. For example:
The two developed countries with the strongest EPS growth between 1980 and 2010 were Sweden and Switzerland, which each had lower than average GDP growth. Canada and Australia, which saw the strongest GDP growth, showed very little aggregate EPS growth. Why? A big reason is dilution. Canada and Australia saw strong growth from their commodity producing sectors, but that growth came from massive investment, which was funded by diluting shareholders. Switzerland and Sweden did not invest as much and did not dilute their shareholders, leaving shareholders better off despite lower economic growth.
To read the whole article, GMO Quarterly Letter: Ditch the Good, Buy the Bad and the Ugly, go to the website of GMO LLC.
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