Economic Growth vs. Equity Returns in Emerging Markets

An important controversy in modern finance is the conclusion by some researchers that countries with high economic growth rates do not deliver superior equity returns versus nations growing slowly. The absence of a positive growth-return correlation was first suggested by Siegel (1998). In a comprehensive and influential study covering 16 countries and using a century of history extending back to 1900, Dimson, Marsh, and Staunton (henceforth DMS) (2002) found that the growth-return correlation was actually negative. Ritter (2005) employed somewhat different sources and reported that the growth-return correlation was zero for 19 developed markets from 1970 to 2002 and negligible for 13 emerging markets using data from 1988 to 2002. DMS (2010) updated their original work and confirmed that for 44 countries, there was no statistically significant relationship between growth and returns.