Stock Market Shows Country’s Actual Economic Growth

it is a simple theory that stock market reflect economic growth of the country,
but the funniest thing is we had a 8% growth
Unfortunately we don’t have anyone to show the truth to MR bcos of …..

(beware of computer gilmats ??)

Universalgoal wrote:it is a simple theory that stock market reflect economic growth of the country,
.........

Unfortunately or fortunately not in Sri Lanka .

CSE is not a traditional stock market. It is small and illogical at times. When bad it can come down to illogical levels and when on a uptrend it can over value by large.

Luck and smart long term moves will favor the brave.

Universalgoal wrote:it is a simple theory that stock market reflect economic growth of the country,
but the funniest thing is we had a 8% growth

The funny thing is this theory does not work in real life.

Otherwise, how do you explain this?
USA market (S&P 500) is trading at a P/E Ratio of 14.85 - while its GDP is expected to grow at only 2.3% p.a. during 2012-2016, while...
Sri Lanka's market (ASI) is trading at a P/E Ratio of 9.97 - while our GDP is expected to grow at 6.6% over the same period.

Sometimes back I read this, may be helpful for the discussion.

"Economists spend a great deal of time thinking about GDP growth rates in various countries around the world and investors often consider these forecasts when deciding where to put their money. Common wisdom is that countries with strong long-term economic growth prospects are more likely to provide attractive stock market returns than countries with slower growth expectations. Interestingly enough, the historical data does not back up this belief."
- By Rajiv Jain, Managing and Daniel Kranson

Further they stated in their article "The Myth of GDP and Stock Market Returns"

> GDP is analogous to sales; stock returns to corporate profits. GDP represents the value of all goods and services produced in a country during a given year; it does not reflect the profitability of those sales. If sales are strong and corporate profits are low, share values are unlikely to appreciate. For instance, a company might triple sales by lowering the price of its goods below cost. This would boost GDP, but it would also be likely to hurt the company’s profitability and its share price. This might occur during a price war or if politics forced companies to take actions that were not in their best economic interests (think China and, increasingly, the United States). Additionally, higher sales may not translate into improved corporate profits and shareholder benefit when taxes rise or wages increase.

> The stock market does not reflect the full economy. The performance of private, government-owned, and newly formed companies generally is not reflected in the stock market, but is captured by GDP.

> A company’s profits may be earned outside the country in which it is listed. Multinational companies operate around the globe. When one is highly profitable and its share price rises, it is unlikely that the stock’s performance reflects GDP growth in the country where the company’s shares are listed. For example, Nestlé is listed in Switzerland, but most of the company’s sales and profits are derived outside its home market. As a result, Swiss GDP growth and the performance of Nestlé stock are unlikely to be highly correlated. Additionally, multinationals tend to be large companies and, as most equity market indices are market-cap weighted, they dominate their indices. Consequently, multinationals may exaggerate the differences between GDP growth and equity market returns.

> Estimating GDP is not an exact science. It is difficult to calculate GDP accurately. Furthermore, even if a country were able to accurately calculate GDP, politicians may be inclined to distort the data for political reasons.

> Dilution hurts shareholder returns. When a company issues additional shares to raise capital, the value of current investors’ shares may be diluted. Consider what most western financial companies have gone through during the past year. Even if companies such as Royal
Bank of Scotland or Bank of America match the sales and profitability levels achieved several years ago—a neutral event for GDP—they will deliver very weak returns to longtime shareholders whose portion of the companies’ profits have been diluted. It is, in fact, earnings-per-share and not overall corporate profits that matter to stock market returns.

> Poor corporate governance affects share price performance. Breaches of corporate governance also can affect the relationship between GDP growth and stock returns. For instance, if a majority shareholder forces a public entity to transact business with his privately owned company at unfavorable rates, GDP is not harmed, but corporate profits and the public company’s share price are likely to be hurt. Also, poor use of corporate cash—investing in projects or acquisitions that make a company larger without providing economic benefits—can help GDP and hurt share values.

Gilmart is every where.
Thanks Slstock,Antonym and Sriranga for the feedbacks.

Only the banking, plantations sectors are truly represented somewhat in the CSE.
Only garment manufacturer is a recently listed single company although we have a major garment sector. If you check out the food sector the majority would be chicken farms. So if the stock market reflects the economy then our most significant produce should be chicken production and export. For construction industry what remains is really a ship builder. (Oh yes Access came recently)

thank u all for valuable information,
but i personally feel the growth should touch your body, your heart and your life not only local but outsiders too
in that case stock market play a major roll among other tools

recently one of my friend (a foreigner) talk to me and he said afraid to invest in your country
the given main reasons in brief were
* no proper or flexible tax policy (within one night it will destroy my everything)
* day by day your stock market crashing (no sign of recovery or healthy)
* UNHR problems (look like sorting out)

no offence this is my view may be not your

Yes policies are crazy. You could go to toilet to pee and when you come out your vehicle price could have gone down by half or doubled.
Not to talk about other "luxury items"