It seems like investing in fast-growing emerging markets should be no-brainer.
Growth is good, and companies in growing economies should have a better chance of taking advantage of that, right?
Too bad it’s not that easy.
Since Bill Gross recently came out with a much-maligned letter about how equities shouldn’t be able to outperform GDP, a number of analysts have come out with rebuttals pointing out that equity returns don’t have anything to do with GDP.
One of the most compelling rebuttals comes from Gerard Minack of Morgan Stanley. He made several points in his note, but one of our favourites related to this chart, which shows a relationship between annual earnings growth and the pace of shareholder dilution.
Basically: In places where earnings are growing fast, companies are raising a lot of capital by issuing shares, and therefore actual earnings per share fail to keep up, preventing investors from enjoying those gains.
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