Fast growth, low return
Emerging markets are popular with investors because “faster economic growth means higher returns,” says The Economist in an editorial. Only it doesn’t. According to a London School of Economics study of 17 countries, the economies with the slowest GDP growth “returned 8 percent a year,” while the fastest-growing ones returned only 5 percent. Other studies have found similar but wider disparities. “Why should this be?” In emerging markets, investors benefit if capital is reinvested in growing publicly traded companies, but many times it’s put instead into “unquoted” firms or state-run companies. This isn’t to “deny the importance of emerging economies.” It’s just to deny their greater profitability for investors.
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