Stock prices versus GDP growth

Stock prices versus GDP growth

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You may find this material interesting.

I have been looking into a conundrum:

The big "disconnect" between China's rapid growth, of recent years, and stagnant stock indices.

In 10 years, from 2002-2012:

+ China's GDP is up 67.1%,

Stock prices versus GDP growth

=

GDP chart: http://ftalphaville.ft.com/files/2013/04/China-GDP-YoY-and-QoQ-annualised-IHS-Insight.jpg


This is a big difference, and would be interesting to explore why here.


I also want to look at how US stock prices have related to GDP over time.


My bottom line is that I think Chinese stocks may be near an important bottom,

while US stock indices may be set for a pullback.

If I am right, we shall see some sort of Turn within August.

Maybe there is no conundrum, as there is no connect so no disconnect.

http://www.valuewalk.com/2013/02/jeremy-grantham-gdp-growth-and-stock-returns/

Thanks for the Link.


However, I think that chart is the wrong way to look at it, since it is probably a snapshot taken at one point in time.


IMHO: What appears as "noise" or uncorrelation on that chart, is actually very useful information on cycles. The folks who do work like that, throw out the baby with the bathwater - a very frequent practice for academics. No wonder they may lousy traders.


You need to look at the relationship as a time-series over a long period of time.


So: YOU NEED TO LOOK AT THESE CHARTS, to properly understand my argument !


First look at the relationship of Earnings to GBP - I think that you will see a clear and useful correlation:


http://blogs-images.forbes.com/rickferri/files/2012/10/PE2Fig21.jpg


And then look at the relationship between Stock prices and LT Earnings: (ie the Shiller PE ratio)


http://img571.imageshack.us/img571/8884/ho0.png


Also Meaningful IMHO.


If A and B above are both meaningful, then putting them together into C, or Stock prices versus GDP should also be meaningful.


More Charts and Arguments here: http://tinyurl.com/GEI-GDP

I believe the reason that the Chinese market has performed so poorly despite high growth rates is because:


1. The numbers are bogus - they are NOT growing at 7.5%

2. The growth they do have is based primarily on a debt-fueled binge of building ghost cities - that have no ROI


You can fool some of the people - but you can't fool the markets with this bs...

Yes, Ed,

I have heard those arguments.

In fact, they can be elaborated somewhat as follows:


(per Joe Zhang in Sat's SCMP):


Puffed-up IPOs to blame for languishing Chinese stock market : (pg A11)


"China's equity market has been around for 20 years, and its performance has been very disappointing," begins the article:


Bulletpoints:

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+ The Hang Seng China Enterprises Index is up only 44 percent since 1994, but China GDP has grown almost ten-fold


Why the discrepancy?

+ Many Chinese companies "cooked their books" before going public, sometimes assisted by government

+ Special assistance took the form of cheap land grants from govt, low-interest loans, asset injections : all one-off items boosting ST profits

+ After the IPO they used the economic growth to "wash-away" the early excess valuations


But inflation has been described as a "swindle" for equity holders (by Warren Buffett), since it hurts businesses through higher costs, and higher discount rates being applied to Chinese companies.


Also, Chinese H-shares (ie those quoted in HK, and in the HS-China Enterprises Index) once had a scarcity value, and that is no longer true.


Other reasons give by Joe Zhang, author of: Inside China's Shadow Banking and an independent corporate adviser:


+ Managers are often political appointees, and do not work to maximize profits

+ Political interference hurts goal setting, strategy, and day-to-day management

+ Lack of accountability, allows costs (and corruption) to get out of control

+ Chinese co's are often to eager to issue new shares, dilluting shareholder value

HAVING SAID that- There's Another Possibility:


ONE COULD ARGUE, as this Chart suggests:

http://img266.imageshack.us/img266/4033/p4xz.png


Argument:

"China's stock's have slid to a big discount to what they should be trading at - maybe a 20-30% discount to the Lower Band of GDP. The market is now ready for a big rally."


That rally could be triggered by:


+ A reversal of the Capital flows that we saw, with money flowing OUT of China in 2012, for the first time in years


+ Some new government policies that would restore confidence in stocks


+ New efforts to improve the management and governance of SOEs and other quoted Chinese co's


+ A genuine effort to tackle the banking and credit crisis that we have been reading about in the papers.


The Market right now is not expecting any of the above, so if we see some progress, sentiment could turn fast.


I am still looking for a bottom in June at a Target price of 1,777 for the Shanghai composite - but you should think of that as +/- 100 points