"Faster economic growth = lower the stock returns!"

At a time when more international funds are being launched to lure Indian investors, an article in the Wall Street Journal - quoting a study by Elroy Dimson of London Business School - serves as a good reminder on the real purpose of international investing - diversification. Not returns chasing.

Based on decades of data from 53 countries, Prof. Dimson has found that the economies with the highest growth produce the lowest stock returns -- by an immense margin. Stocks in countries with the highest economic growth have earned an annual average return of 6%; those in the slowest-growing nations have gained an average of 12% annually.

...if you think about this puzzle for a few moments, it's no longer very puzzling. In stock markets, as elsewhere in life, value depends on both quality and price. When you buy into emerging markets, you get better economic growth - but, at least for now, you don't get in at a better price. "It's not that China is growing and everybody else thinks it's shrinking," Prof. Dimson says. "You're paying a price that reflects the growth that everybody can see."

...High growth draws out new companies that absorb capital, bid up the cost of labor and drive down the prices of goods and services. That is good news for local workers and global consumers, but it is ultimately bad news for investors. Last year, at least six of the world's 10 largest initial public offerings of stock were in emerging markets. Through June 30, Asia, Latin America, the Mideast and Africa have accounted for 69% of the dollar value of all IPOs world-wide. Growth in those economies will now be spread more thinly across dozens of more companies owned by multitudes of new investors.