High growth in gross domestic product (GDP) appears to have little correlation with the long-term trend rate of growth in corporate earnings. The chart from Citigroup Global Markets shows that the trend rate of growth in earnings per share (EPS) for Chinese companies has been a measly 2.2% per annum. The problem is that Chinese companies have been quick to increase capital, thus diluting earnings. The upshot is that equity investors who were invested in MSCI China would have seen their capital erode by 2% per annum. Thankfully, the computation doesn’t include dividends—include them, and total returns increase to 0.4% per annum. The Indian market, however, has very strong growth in EPS, a reason for the valuation premium it enjoys. Returns from its market, too, have been high.
Also See | Graphics
However, what really matters for capital appreciation is catching the swing in earnings. Investing at the bottom of the cycle is what gives investors outsized returns.
Graphic by Ahmed Raza Khan/Mint
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