even without certainty,
than not to foresee at all. ~ Henri Poincare, French scientist (1854-1912)
We spend a great deal of time on the Forum looking backwards, analyzing the history of asset returns and financial data, so a couple of posts may be in order that glance toward the future. Some will hastily object, "nobody knows nothing!" and hopefully will move on. But this post makes the case that there's at least a few broad trends worth considering about the next 30 years — not with certainty — but in hazy outline, like an impressionist landscape painting.
World GDP from 2018 to 2050 — A Bit Speculative
The first pillar of economic growth is the rate of population growth, which is fairly predictable in its future course (barring a global pandemic) and where we have solid trend data for each country. The second pillar is real GDP growth per-capita (closely related to labor productivity growth) for which we can make reasonable future estimates based on current experience.
Adding these two pillars together gives us a crude GDP growth rate to 2050 for each major economy, which is applied to today's GDP values (chart below). These projected real growth rates vary from 4%-5% for the fast-growing economies of India and Indonesia, to 3% for China and Mexico, to 1-2% for the mature economies of Japan, Europe and the U.S. (from OECD).
NOTE: Values are real (inflation-adjusted), in USD, at 2010 purchasing power parity — and in billions.
Source: Latest OECD forecasts.
World Market Cap from 2018 to 2050 — Very Speculative!
We also know from history that, with few exceptions, a country's stock returns usually grow faster than its economy, assuming reinvested dividends. This relationship is not constant and there's been a wide variation between countries, due to share dilution, financial crises, and destructive conflicts. But for the world as whole, over the 114 years from 1900 to 2013, the real rate of GDP growth was 2.8%, while the real total return on equities was 4.5% (from Dimson, Marsh & Staunton).
Using a regression analysis of historical equity markets against GDP — and going far out on a limb — the economist Jeremy Siegel (in his Stocks for the Long Run, 4th ed.) makes a projection of the world's stock market capitalization in 2050 (at right below). His model forecasts that China, India and today's other emerging markets will make up 65% of global market cap in 2050, with the developed market's share shrinking to 35% — though, admittedly, it's hard to take these numbers too seriously.
A Closing Caution
To be clear, this is not an encouragement to load up on emerging market equity! Rapid economic growth rates do not necessarily translate into high returns for index shareholders, mainly due to share dilution. In Mr. Siegel's words:
His point is that in rapidly growing economies, companies are constantly raising capital by issuing new shares and spinning off new enterprises — none of which directly benefits existing shareholders. In fact, less than half of the total stock capitalization in emerging markets today is free-float and included in the major indexes, with the majority of shares owned by closely-held private groups, other linked companies and government entities.Jeremy Siegel wrote:Investors should be warned that the increase in a country’s share of world capitalization…does not necessarily represent capital appreciation of existing shares. Rather, most of the increases come from the flotation of new capital…
In short, we can have confidence in future GDP growth, but just not which companies and shareholders will best profit from it.