Research reveals Scandinavian land whose corporates trump even China’s since 1970s

The eye-watering earnings growth among Chinese companies since the early 1970s made their economy the world’s second largest. But at the same time they diluted shareholders by an equally eye-watering almost-30%, according to new research, meaning even investors in one comparatively tiny economy in Scandinavia were better off over the same period on an earnings per share growth basis.

It was perhaps predictable that Morgan Stanley would illustrate long-term earnings growth by way of the example of China, whose explosive manufacturing-led boom has helped it overtake Japan to become the second biggest economy, behind only America.

But it is harder to guess which European land Morgan Stanley says trumps China when it comes to earnings growth per share.

For that medal, Denmark steps forward.

Admittedly its mature economy could hardly beat the 41% earnings growth since 1972 in China, which evolved from being a largely agricultural land with nascent offshore heavy goods and textile manufacturing using cheap labour, to a well-mechanised economy.

Earnings in Denmark, by contrast, averaged just 15%.

But Morgan Stanley points out businesses must raise capital to fund growth, and in faster growing economies that need more capital – such as China – this means earnings per share are diluted more heavily.

Chinese companies have diliuted their shareholders by almost 30% over the past 40 years.

(This is also a partial explanation of why the fastest expanding economy does not always reward shareholders of its companies the most.)

Denmark was able to offer shareholders in its firms 12% EPS growth, 2% higher than China, over the long term.

The US bank’s analysts then turned their attention to economies whose companies can return investors more than the GDP growth rate of the home country.

This might at first seem unlikely, as domestically-focused concerns could not outpace the rate of growth of their ‘homeland wealth’.

But it is fairly common for shareholders to make more from companies than the GDP rate would suggest they can.

In the US, for example, nominal GDP increased around 850-fold (6.25% a year) from 1900, while $1 invested in equities over the same period would have multiplied 25,000 times (9.5%), Morgan Stanley said.

The reason? Dividends, and investors reinvesting distributions in the company’s shares.

But if all investors faithfully did this, this outperformance of GDP growth would not happen, the US bank adds, “because for equities the surfeit of capital coming from a compounding cascade of reinvested dividends would, sooner or later, crush margins, hence earnings, hence capital values, and hence future dividends.”

Applying the same logic to US credit, if investors took their coupons and loyally reinvested them in corporate USA, this “would mean rolling back 7% of the debt stock each year as new debt [and as] corporate debt in 1920 was around 70% of GDP, it would now be 464% of GDP, if it grew in line with ‘reinvested’ corporate bond returns.

“So here’s the Catch-22: over the long run theoretical total returns can exceed GDP so long as investors don’t actually try to capture those returns. But if ever investors try to achieve such GDP-plus total returns, it will be impossible for returns to stay above GDP growth.”


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