3983090

I’ve banged on about this many times before and I’ll keep doing so, simply because it’s the Truth.  Economic growth is important, as it allows for greater earnings growth, but it does not directly translate and is certainly no indicator of returns.
8161995_orig

As you can see from the above pattern – there is no pattern!

There is no direct relationship between investment returns and economic growth. That doesn’t mean that economic growth isn’t important, I’m sure earnings growth would be less over time if there wasn’t economic growth.  It just means it doesn’t matter what the economic growth is at any given time. (or perhaps more accurately, it doesn’t matter what the “official measure” says it is)

Therefore we don’t really care how what the growth rate (ie GDP) is at any given time, provided it’s basically heading up.  It might change where we invest, but not whether we do or not.

So what about Earnings Growth?

9074990_orig

Earnings growth however is clearly a different story.  We can see a trend above.

And not surprisingly, it’s no different in Australia, profits are what matter

3860608_orig

And again for the US Market
9381198_orig

OK maybe that’s a bit much but hopefully I’ve made my point.  The only thing left is the “but does that make sense” test.

Well, would you be willing to pay more for something that pays you more?  Ie would you pay more for a property that pays $500 a week rent than you would for one that only pays $200 a week?  Therefore it stands to reason that the value of the property that currently pays $200 per week will cost more when it’s paying $500 a week rent.

Earnings clearly are what matter as they are the driver of real value.

Matt Battye

CEO, Financial Adviser

Analysing what can seem to be like complex issues, Matt is effective in using analogies to better explain scenarios and truths to the rest of us. This is what Matt enjoys – educating clients on the truths and debunking the commonly held (wrong) view.

Share This