Stock markets vs GDP growth in South Africa

Abstract

nvestors look at stock market performance and assume that it anticipates economic developments or that the latest GDP quarterly figures have a huge effect on the market’s movements. This study seeks to test if this is true in the long-term. According to a study of the USA stock exchanges done by Holger Sandte (2012) he found that this relationship does not exist. In this paper, we examine the relationship between GDP growth and stock markets returns. We observe that the relationship between these two variables remains complicated because of the effects of multiple factors interwoven over time, which can differ from one country to the next (Boubakari and Jin, 2010). While accurate economic forecasts are helpful for stock investing, we argue that investors should not rely on a single economic indicator in predicting future market developments. As counterintuitive as it might seem, research suggests that high growth rates do not necessarily correlate with the highest long-term stock market returns (Levine, and Zervos, 1996). Nevertheless, major stock market movements may contain valuable information for economic forecasters. This paper reveals that the relationship between the FTSE-JSE All-Share Index growth rates and GDP growth rates is coincidental and cannot be used for prediction. Stock prices generally reflect investor expectations for future corporate earnings and consequently for future economic growth but the papers argued that this relationship cannot be modelled to accurately predict the stock market growth from GDP growth. The findings of the study indicate that investors should not rely on past economic growth as an indicator of future stock gains. Accurately forecasting future economic growth might help but those forecasts are difficult to get right. We suggest that investors should not base their stock investments purely on economic cycles because of the unreliability and unpredictability of such cycles. It is advisable that investors look at fundamentals before investing in high-risk equity markets of growing economies