The map at the top of this article represents total return of various stock market indices around the world. It includes both capital gains/losses in each of the countries represented as well as dividend income and currency gains/losses. Since currencies are in constant flux in value relative to one another, shifting foreign exchange rates can often either magnify or reverse gains within the market of a country when they are brought back home and exchanged for the domestic currency of the investor, for example the U.S. Dollar.
Color code is based on total return – returns in home stock market and in currency exchange. Colors are based on returns relative to each other – red is lowest, yellow is close to zero, and green is higher return.
Color code of the second map is based on profit growth rates.
Green means companies in the country indices in question grew earnings faster than the rest of the countries represented, yellow means they stayed roughly the at the same growth rate as the rest, and red means they grew more slowly.
If you compare the two maps, you can see that they don’t match each other fairly well. This means that profit growth was a significant driver of returns.
The maps below show total return next to changes in stock prices, i.e. capital gains/losses.
The fact that they look pretty similar means that the total returns were driven by capital gains, which should be no surprise given that we have already seen that currency price changes did not generally coincide with returns. Returns have to come from somewhere, and if it’s not currencies and dividends, then changes in stock price is the only option left.
There are notable exceptions: China, Turkey, Australia, Peru, and Chile, each of which had good profit growth but not good returns.
If it seems weird that earnings are driving returns, it’s weird that it seems weird. Over the long run, profits drive stocks. Normally. But we have had an abnormal decade, a decade of ‘financial suppression’ with central banks messing with interest rates, the valuation plumb lines of the financial markets. I’m not ready to say that financial suppression, or the cessation of financial suppression, is done with us yet. Interest rates are still historically low and central banks still have a lot of money sloshing around the world, so it’s not settled that profit growth will stay in charge of global markets.