Is it surprising that all countries with a considerable stock market are also wealthy economies? Or will the stock market improve the economy?
Intuitively, efficient financial markets should help businesses raise growth. This will increase the economy. recently paper It appears to be confirming that from the Federation of World Exchange (WFE), which is based on a wide range of research bodies in the field.
More developed financial markets have higher market capitalization and GDP
Looking at the data, we see that wealthy countries tend to have larger stock markets – even after adjusting population size (finding gross domestic product (GDP)/head and market capitalization/head), you can still compare the size of large and small side by side.
However, the opposition appears to occur in low-income countries (green circles).
Chart 1: Countries with large stock markets have large economies
High-income countries have strong institutions and retail participation
So, what does a high-income economy do differently?
For one thing, from other data (hereinafter referred to) it appears that investors need to invest their capital. They need to trust their country’s institutions and regulatory bodies.
In the chart below, you can see that the high-income economy (blue bar) consistently has a high “rule of law” score. World Justice Projectthan the low- and middle-income economy (green bar).
Chart 2: Strong rule of law is effectively a prerequisite for a high-income economy
Similarly, you need a financial market with the right infrastructure.
Ranking financial market developments in countries measured by international financial funds Financial Market Indextaking into consideration the “depth, access, and efficiency” of financial markets in each country.
Countries with higher income levels tend to develop more financial markets, while some (most) small European countries have defied the overall trend.
Chart 3: High-income countries tend to develop better financial markets
As we have shown in the past, high-income countries like the US, Sweden and Australia have the highest levels of household investment in stocks.
From the data it appears that a strong rule of law and highly developed financial markets provide an environment for capital attracting.
Chart 4: Investor participation may promote a positive feedback loop from stock market to GDP
And Goldman Sachs research shows that countries with higher shareholdings in the country tend to get a higher rating.
Chart 5: Higher ownership of domestic stocks correlates with higher stock valuations
It’s good for businesses as it reduces their capital costs and encourages more companies to go public.
All of these factors help to promote this positive feedback loop between the stock market and GDP.
The stock market drives economic growth through multiple channels
We already know that countries with relatively large stock markets tend to be rich. And we know that rich countries tend to have strong institutions and active retail participation in the stock market.
but how Does the stock market affect economic growth?
In their recent papers, WFE Show There are multiple ways:
- Efficient allocation and mobilization of capital. Once a company is made public, it is given money to invest, expand and innovate, ultimately driving job acquisition and economic growth. For investors, they are trying to invest in the most promising companies, helping them with the best opportunities to grow economic growth and impact.
- Fluidity channel. As the market becomes more fluid, they could potentially drive economic growth by attracting more investors, increasing the pool of capital and investing more money.
- Information channels. The market is the price of all available information, which makes it easier to monitor companies and make more efficient allocation decisions to provide information to investors and creditors.
- Diversification. The stock market helps investors manage risk through diversification and spread investments between low-risk, low-reward companies and high-reward companies.
- The effect of wealth. As assets prices (stocks, houses, etc.) rise, the wealth of owners increases, giving them more confidence in their financial situation and inducing them to increase the economy.
This wealth effect has been seen during play over the past 35 years. If you are investing in US S&P 500 shares, you have acquired over 3600% of the shares since 1990 (chart below, Orange Line). That’s over 10x Home returns (purple lines) that are rising above 300% and far better than holding bonds.
Chart 6: Thank you for the home price 10 times the price-earnings ratio over the last 35 years
Therefore, in the short term, inventory can become more volatile, but it is a fundamental component of wealth creation as it is outperformed in the long term. And these investments help businesses expand their economy and their revenues fund consumer spending.
Equity Markets promote economic growth in the short and long term
So, how do you do a WFE paper? Prove Will stock market growth strengthen GDP growth?
They see the 37 countries we’ve seen above for over 20 years. They track real GDP and metropolitanization in the stock era ratio – The size of the stock market versus the size of the economy – interacts.
They find it in the short term:
- High-income countries: Between the market capitalization ratio and economic growth there is a positive feedback loop in which one growth causes the other.
- Low-income and middle-income countries: Relationships go in one direction, and the market capitalization ratio increases, economic growth increases.
One-way relationships in low-income countries seem to speculate that stocks play a “basic role in economic development,” but lack of investor participation could limit communication from economic growth return to market capitalization.
Still, in the short term, effect The increase in market capitalization ratios for low and middle income economies big More than a high-income economy. In fact, we look at the low and middle income economy roughly. triple The boost to GDP growth (the chart below, green bar) that the high-income economy reaches from a positive “shock” to the market capitalization ratio (blue bar).
Chart 7: Positive shock to market capitalization increases GDP, especially for low- and middle-income countries
In the long run, this relationship is one way of all countries, increasing market capitalization ratios and driving economic growth. However, this time, the effects of high-income countries are huge. the study It has contributed to economic growth by suggesting that “companies with access to more developed stock markets will grow faster.”
Therefore, we can see that in all countries a 10% increase in market capitalization leads to a 0.028% increase in long-term economic growth, whereas in high-income countries alone, it leads to a 0.045% increase in long-term real GDP growth.
This may sound small, but it adds up over time. For example, consider the US economy. If the US market capitalization ratio suddenly increased by 10% in the early 2000, the economy would reach 1.1%, or $300 billion, which would grow today (almost Finland’s GDP). This is because it raises the US trend growth rate from 2.14% to 2.19% over the past 25 years.
And this relationship is not merely a correlation. This paper uses multiple econometric methods to prove one-way causality. They do this by statistically indicating that economic growth depends on the ratio of market capitalization. In short, GDP is improved by increasing the market capitalization ratio.
Countries should pursue improvements in stock markets to promote economic growth
Intuitively, it seems important to promote capital formation.
This recent WFE paper proves that it is a good idea. Regardless of where a country falls on its revenue spectrum, promoting a healthy stock market is an important way to support investors’ economies and economies.
