It's common to associate high GDP growth with booming stock markets, but the correlation between the two is actually quite weak, says investment firm Goldman Sachs. From its data set of 25 emerging market economies that make up the MSCI emerging markets universe, Sachs found a slightly negative correlation between per capita output growth and equity returns "" the correlation got worse when overall GDP growth was taken. Between 1993 and 2005, when the Chinese economy was booming, the report says, the MSCI China index fell 70 per cent. So what matters more than economic growth is the earnings of corporates "" in growth phases, often enough, the real growth comes from new companies which is why the stock markets don't capture them. Sachs, however, finds the correlation between business cycles and stock market returns is much stronger "" the average emerging market equity return during recession periods, it found, was only 5.5 per cent as compared to 17 per cent during non-recession periods. The other interesting insight Sachs gets from its data is that emerging markets which have lost more than 50 per cent of their value over the previous two years, on average, tend to see a 55 per cent growth over the subsequent two years; those which have gained more than 50 per cent over the previous two years, tend to enjoy returns of just around 7 per cent in the subsequent two years. Let's see if this holds for India.
