Ask MoneySense: Emerging markets

Why have equity funds focused on China done so poorly when the economy is growing at 9%? Even the iShares China Index Fund was down 16% last year.

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From the April/May 2012 issue of the magazine.

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EMERGING MARKETS

Why have equity funds focused on China done so poorly when the economy is growing at 9%? Even the iShares China Index Fund was down 16% last year.

—Linda Jacobson, Toronto

While a strong economy is generally good for equity markets, it’s important to remember that China’s growing economy is no secret, and big expectations are already baked into stock prices. Countries with high projected growth rates are perceived as less risky than those with low projected growth, and lower risk usually means lower returns.

“Associating high or positive GDP growth with high stock returns is a mistake,” says Raymond Kerzérho, director of research with PWL Capital in Montreal. He cites a 2004 study that showed a negative correlation between gross domestic product growth and after-inflation stock returns during much of the 20th century.

What’s more, Kerzérho says a recession is not necessarily a bad time for equities. While U.S. stocks did plunge during the 2008–09 recession, this wasn’t always the case during previous recessions. The S&P 500 index had positive returns during five of the nine recessions between 1953 and 2001. “Even if someone could predict recessions accurately, it would not be of any use in stock market timing,” Kerzérho says.

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