Strong GDP growth is BAD* for stock investors. Strange; but true.
[*This isn’t a new notion and has been discussed for some time. For a very accessible paper on this see Jay Ritter here from 2012.]
At a time when analysts are in broad agreement China’s economic growth is on a slowing trajectory this is an important topic. If strong growth hasn’t been the China stock investors’ friend in the past, what does lower GDP growth in the future imply? Higher stock prices? Weeell, maybe?
To today’s paper. Samuel Xin Liang of the Tyndale University of Toronto dives into returns for Chinese stocks listed in Shanghai and Shenzhen to find out what has driven them up to now. GDP growth, along with Rmb appreciation and momentum, it turns out are all performance retardants.
What explains positive returns is what most will want to know? In a nutshell; big and cheap i.e. big stocks that are manifestly cheap have reliably rewarded over time in China’s stock markets [D’uh!].
If your interest is piqued you can access the paper in full via this link China Stock Price Drivers. Strong GDP growth-BAD is the most important point though and triangulates with established work; I’ve no doubt this finding is robust and will be persistent.
[The paper’s nitty-gritty goes into more detailed ‘factor-modelling’ of which I’m not a big fan and I’m less confident conclusions there will prove similarly reliable over time (they might of course)] .
So, China slow-down; bring it on? Well, yes; maybe.
Happy Sunday.