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If a country’s economic growth slows down or speeds up, many assume that its stock market will mirror that performance. There is a close relationship between the two, yet it is not as simple as saying the rate of GDP will be the precise amount you will make from a fund tracking a particular country’s stock market.
Investor expectations drive markets and there are many factors that influence people’s thinking. These include politics, corporate news and market sentiment. Here’s how economic activity fits into the mix.
Is economic growth equally important for developed and developing countries?
Many investors are drawn to developing countries (also known as emerging markets) by the high economic growth rates on offer. They assume rapid GDP growth equates to big stock market returns. In good years, emerging markets can significantly outperform developed markets. The opposite can apply in bad years, meaning investors need to be patient and have a high appetite for risk.
Economic growth can be aided by technological innovations, a growing base of people that can afford to purchase goods, and a government that may have a large hand in industry. The effect can be more pronounced in developing countries because growth is coming from a lower base.
Sat Duhra, portfolio manager on the Asia ex Japan equity team at Janus Henderson, said: “When you're looking at companies, you prefer to invest in economies that are growing nicely, where there's a good consumption trends, there's positive economic growth, and upward GDP revisions. That's a good backdrop for investing. So, if you invest in India, for example, you believe in the long-term story there.
“But, if an economy grows at 7% or 8%, or whatever the number is, I think the direction is more important rather than the actual number.”
How has the market been able to grow in developed countries?
Don’t be fooled by lower-growth economies from an investment perspective. The US has had relatively uneventful annual GDP growth of 2.1% on average from 2005 to 2024, but the S&P 500 index of US companies has managed an average annual return of 9.8% over those 20 years.
Even when economic growth is lower than the worldwide average, innovations in areas like AI have pushed certain markets towards impressive growth.
On average, the UK’s GDP grew by 1.4% annually from 2005 to 2024. Meanwhile, the past 20 years have seen an average annual return from the MSCI UK stock index of 6.5%. Both figures sit below the worldwide average of 3.4% for GDP growth and 8.4% for market growth, based on the FTSE all-world index.
But just because the growth was slower, that did not mean that stock market growth slowed by the same amount. In comparison to its GDP, the market for the UK grew at near five times the rate. Meanwhile, world markets only grew at 2.5 times fast than the world average GDP.
For developed countries, there lies the issue with relying on an economy’s growth for how a market will perform. Although the market might not have the boost from the growing economy, it could have other factors that pushed returns higher.
Young Jae Lee, senior investment manager at Pictet, said: “If you look at developed markets, working population is declining for the US, UK, and most of the Western European countries. But their GDP is still growing, more driven by capital, more driven by technology development.
“In the case of emerging markets, they’re also getting benefit from capital and technology development, but because their labour market is still growing, that’s becoming bigger a part of the GDP growth still.”
The market boost of a developing economy
Certainly, some of the stock markets with the highest growth in recent years have been through developing economies. For example, based on an annual average over the past 20 years, the FTSE India index has grown at an average rate of 13.9%, as its GDP has raced along at 6.4%. Similarly, the FTSE Indonesia index has averaged 10.9% while GDP averaged 5.1%.
It is less simple than attributing these market performances purely to a growing economy. Just look at China. After being the poster child for a market in a developing economy for years, China’s economy has suffered from a slowdown in the pace of growth.
“The problem is, how (is a country) creating that GDP growth? With China, it's investing, and its debt is going higher, and that creates more risk. Even though they're growing, investors don’t like that,” Duhra said.
“I think that’s been a big concern. Even in the last three or four years, where China’s (market) has not performed very well, its GDP has still been growing. So, these concerns in terms of how it grows are very important.”
Alternatively, in Brazil, the average annual economic growth in the past 20 years is behind the world average. Despite this, the consumer base is growing quickly, and the average growth of the MSCI Brazil stock index is just behind the MSCI USA index.
This growing consumer base can make a developing country such as Brazil a prime place for quick growth. For example, the development of Brazil-based NuBank, an online banking service founded in 2013, caught a consumer base changing from cash to card services. By 2024, NuBank had reached over 100 million customers in Brazil, and expanded to Mexico and Columbia.
This sort of growth likely would have faced additional friction in developed countries, where access to institutional banking is more established. Revolut, the online banking app across the UK and Europe created in 2015, ‘only’ reached 50 million users last year. When these processes have been more developed in a country, the rapid possibilities for growth can slim.
Investors wooed by these sorts of potential returns seem to be willing to ride out instability, in both in stock market and GDP growth. Just look at Brazil. Stock market growth has changed rapidly between positive and negative returns year to year. And while the GDP of Brazil hasn’t moved with the market, it has also been extremely volatile.
“I think a country’s own situation can impact many things for a stock. It includes their current economic outlook, political reliability, regulatory framework and labour market conditions,” Lee said.
GDP figures in this article are based off data from the International Monetary Fund from 2005 to 2024. Market growth numbers are based off the MSCI index for each country, from 1 January 2005 to 31 December 2024.
Hannah Williford: Content Writer
Hannah joined AJ Bell in 2025 as an investment writer. She was previously a journalist at Portfolio Adviser Magazine, reporting on multi-asset, fixed income and equity funds, as well as macroeconomic impacts and regulatory changes...
