The gross economic product (GDP) data and market performance have little correlation, reveals an analysis done by domestic brokerage ICICI Securities.
“GDP has virtually no correlation with near-term stock returns. Correlation between the GDP and the Nifty50 returns for the quarter in which the GDP is reported is just 5 per cent with an R-squared value of 2 per cent. Cross country evidence by researchers also indicates that even over the long-term there is no correlation between GDP growth and stock prices,” the brokerage said in a note.
Therefore, it is often seen that the market rarely reacts to the release of economic data such as GDP growth or factory output. As these data points are released with a lag, they often get fully priced-in along with expectations of future growth trajectory.
ICICI Securities said there are a number of other factors which cause divergence between GDP and stock prices.
“New age loss-making ventures, regulatory changes, and high competitive intensity (telecom) have negatively impacted corporate profitability although GDP components may continue to grow (productivity, wages, credit growth, and data usage),” it said.
Indian companies’ global operations also lead to divergence.
“Overseas operations of companies such as Tata Motors, Bharti Africa operations have had an adverse impact on corporate profitability in the recent past but may have very little impact on domestic GDP,” the brokerage said.
So what are the factors that investors should eye to gauge the impact on stock prices? ICICI Securities said some of the key factors that stocks and valuation multiples are global central bank policies, government spending and reforms.