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- The idea that investing in the stock market of a country with high economic growth will result in high returns can be a misconception, and stock market returns are determined by a variety of factors, not just economic growth, but also corporate growth, profitability, shareholder return policies, and valuations.
- Over the past 10 years, the US stock market has recorded high returns through improved corporate profitability and active shareholder return policies, but it is likely that future returns in the US stock market will be difficult to maintain at past levels.
- The slowdown in US stock market returns is due to the difficulty in sustaining corporate shareholder return policies and the possibility of long-term economic deterioration, and investors need to adopt a positive attitude of accepting the reality by abandoning their hopes.
One of the common misconceptions among individual investors is that investing in the stock market of a country with high economic growth will also result in good returns. While this is not an entirely unreasonable idea, it is not a very sophisticated thought.If economic growth (GDP growth) is so important, why is the return on the Chinese stock market, which has shown nearly three times the GDP growth of the Eurozone over the past 10 years, lower than that of the Eurozone?
This is because, in the process of converting economic growth (GDP growth) into stock market returns, several factors are taken into account: 1) Top-line growth of listed companies, 2) Margin of listed companies, 3) Shareholder return policies of listed companies, and 4) Valuation of the stock market.
So, if we look at the return of the stock market over the past 10 years by country, broken down by these factors?What is the key to the superior performance of the U.S.? Not GDP growth, but rather, improved corporate margins and rising valuations driven by aggressive shareholder return policies.
What about Japan? While GDP growth is significantly lower than that of the U.S., and valuations have declined, corporate margins have improved significantly, and shareholder return policies have improved compared to the past.
The Eurozone has seen sluggish GDP growth and top-line growth, but improved margins and shareholder return policies have offset this, putting it in the middle.
What’s the problem with China, which has the highest GDP growth? You’ll see a large red bar in the negative direction. What is that? Share count reduction. Since it's negative, it means that the share count has increased significantly, eroding shareholder value.
What about Korea? Similar pattern to China. GDP growth is lower than China's, and the share count is not as high as China's, but it has been steadily increasing. As a result, the return on the stock market over the past 10 years? Last place among major countries.
What is the most important factor driving stock market returns over the past three years? 1st is valuation, 2nd is margin, and 3rd is shareholder return policy. GDP growth? 5th.
What if we extend the period to five years? 1st is margin, 2nd is shareholder return policy. GDP growth? 4th.
Looking at the last 10 years? 1st is shareholder return policy, 2nd is margin. GDP growth? 3rd. So, what is the most important thing for long-term investment? Governance. This is the biggest reason why no one considers the Korean stock market as a long-term investment destination.
The U.S. has improved margins and strengthened shareholder return policies. The kingdom of capitalism, as expected.
The Eurozone has improved margins. Shareholder return policies were ignored until recently, but are now improving slightly.
China is printing shares at will, and everyone is jumping in as soon as there is money to be made, resulting in fierce competition and lower margins. A typical example of a low-level underdeveloped country.
What about Korea? Looking only at the stock market, there is nothing better than China. In other words, the current valuation is not an undervaluation, but rather a fair value.
Why has the Japanese stock market been doing well recently? It's because of the continued improvement in margins and the dramatic improvement in shareholder return policies.
After reading this, individual investors may think, “America is still the best, I should only invest in U.S. stocks from now on,” and go on with the same thought.However, unfortunately for individual investors, the U.S. stock market is likely to find it difficult to achieve the same returns it has shown over the past 10 years.
This is because, in the short term, companies facing their moment of truth will find it difficult to continue the same shareholder return policies as before, and in the long term, the factors that have supported the U.S. stock market’s outstanding returns over the past 30 years are likely to deteriorate in a trend. While the S&P 500 Index's real return, adjusted for inflation, was 5.5% from 1989 to 2019, what about the future? It will be difficult to exceed 2%.
What is needed in this situation?
A positive mindset, not a wishful thinking, but accepting the situation as it is.
