It is sometimes said that a stock market can be a barometer of an economy. There might be a grain of truth in that. But only a very small grain.
For instance, the US stock market performance, as measured by the S&P 500, has been going gangbusters. Over the last decade, it has risen nearly 200% or around 11% a year….
…. But the US economy hasn’t quite matched the dizzying growth rate of the stock market. Nevertheless, America’s economic growth has, at least, matched the long-term expansion rate of the about 3%. That’s not too shabby for a developed economy.
In China, the Shanghai Composite shot up 55% between 2009 and 2015. But it has since slipped back to where it started 10 years ago. In other words, it has done almost nothing in a decade.
So, even though the Chinese economy has more than doubled from US$5.1 trillion to US$12.2 trillion over the last decade – an average growth rate of around 9% a year – the stock market performance hasn’t reflected this, at all.
So, a country’s stock market and its economy are not always aligned, if at all.
That raises an interesting question….
…. According to my back-of-envelope calculation, the economies of the Philippines, Malaysia and Vietnam could overtake Singapore’s economy in eight, 10 and 82 months, respectively, if their current growth rates are sustained.
So, could the stock markets in those three countries outperform the Straits Times Index (SGX: ^STI)?
There is no guarantee. But companies that are positioned to service a rapidly growing economy could benefit.
As an economy grows, it could raise the living standards of its citizens. They could have more disposable income, which could benefit companies that are involved in consumer staples and consumer discretionaries.
Unfortunately, there are no magic formulas and no short cuts to unearthing those companies – just lots of hard work and, elbow grease and shoe leather. In other words, it’s a stock-pickers market. It always is, which is the fun of being a stock picker.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.