Do GDP and stock index ETFs actually grow in tandem?

In the news, we frequently hear about gross domestic product (GDP) in relation to a country’s growth. It is defined as the total monetary value of products and services produced by a country or economy during a specific time period.

The assumption is that when an economy is expanding, GDP figures will be positive, companies will be thriving and growing their business. People will spend more, companies will generate higher profits, and the stock market will rise. However, is this always the case? To investigate, I examined the GDP performance of six economies and compared it to the performance of their major stock indexes/ETFs over the past decade. Here’s what I found.


The United States boasts the world’s biggest economy in terms of GDP and hosts the New York Stock Exchange, the largest stock exchange globally. In addition, the NASDAQ, which is also based in the U.S., accommodates globally recognized technology companies such as Apple, Microsoft, and Google. These firms, along with other top ten holdings in the SPDR S&P 500 ETF Trust (SPY), have experienced significant growth over the last decade.

Before the 2022 stock market crash, the SPDR S&P 500 ETF Trust (SPY) experienced a compound annual growth rate (CAGR) of 14.3% from 2012 to 2021, while U.S. GDP saw a CAGR of 2.1% during the same period. It appears that these two metrics are moving in a similar direction. Consumer spending accounts for over two-thirds of the United States’ GDP.

Following World War II, the United States recovered faster than other nations. Through the Bretton Woods system, other countries were required to link their currencies to the U.S. dollar, which was fixed to the value of gold. Although the gold standard was later abandoned, the U.S. dollar continues to serve as the primary international currency. As the Soviet Union crumbled and Japan endured a prolonged period of economic stagnation, the U.S. solidified its status as the world’s biggest economy, with only China currently presenting a challenge to its position.

For passive investors, investing in large and efficient economies such as the United States through the SPDR S&P 500 ETF Trust (SPY) can be a valuable option as the index includes many of the top multinational corporations and technology stocks. Nearly half of the world’s 500 biggest companies by market capitalization are based in the U.S.

As the American economy continues to thrive and U.S. corporations remain at the forefront of innovation, it appears likely that both U.S. GDP and the stock market will continue to rise. The nation benefits from strong domestic demand, with a population of 331.9 million and a widespread global corporate presence via brands such as Apple, Nike, Disney, Starbucks, and McDonald’s.


China experienced many tumultuous events throughout the 20th century, including World War II, the Chinese Civil War, and the Great Chinese Famine. However, since its economic revitalization, the country has undergone significant growth and emerged as the world’s second-largest economy.

From 2012 to 2021, China’s GDP grew at a rapid compound annual growth rate (CAGR) of 6.6%. However, the iShares MSCI China ETF witnessed a slight drop from US$48.50 in 2012 to US$47.50 in 2022. The two metrics moved in a similar direction until the 2022 stock market crash. The top 10 holdings in the ETF are primarily technology stocks, including Tencent, Alibaba, Meituan, JD.com, Pinduoduo, Baidu, and NetEase. Over the past three years, the share prices of these companies have fallen significantly, resulting in the ETF remaining relatively flat over the past decade.

China’s economy remains reliant on a dual circulation strategy to promote economic growth and advance its common prosperity agenda. The strategy centers on two main pillars: external circulation through exports and internal circulation through domestic consumption, particularly as relationships with Western countries seem to be cooling. With a population of 1.4 billion people, representing nearly one-fifth of the world’s population, China’s domestic market is significant. Additionally, half of China’s population now earns more than the middle-income threshold, and the country’s GDP per capita continues to rise. As China continues to progress, its economic successes and failures will increasingly have an impact on the rest of the world.

Hong Kong

Hong Kong’s GDP grew at a CAGR of 1.6% between 2012 and 2021. As a gateway between mainland China and the rest of the world, the city is well-suited for companies seeking to establish a presence in China. Foreign investors looking to capitalize on China’s growth often invest in the Hong Kong stock market, or trade China A-shares via the Shenzhen-Hong Kong and Shanghai-Hong Kong Stock Connects. Additionally, Hong Kong serves as a crucial capital market for mainland companies and investors to access global investor capital.

Like Singapore, Hong Kong is known for its economic freedom, low corporate tax rates, and its status as an international financial hub. However, in the last ten years, Hong Kong’s growth has been hindered by events such as the Umbrella Movement, 2019-2020 Hong Kong protests, pandemic, and strict zero-COVID policy. Consequently, the economy is losing out on foreign talent and start-ups to Singapore.

AIA Group and Hong Kong Exchanges are the two main constituents of the iShares MSCI Hong Kong ETF, and both have seen substantial share price growth. Hong Kong’s economic outlook seems bright with the reopening of its borders to mainland China and the rest of the world, although it faces challenges such as an aging population and brain drain.


Japan’s GDP in current USD terms decreased from $6.3 trillion in 2012 to $4.9 trillion in 2021, while the iShares MSCI Japan ETF increased from $39.00 in 2012 to $54.44 in 2022. The decline in Japan’s GDP may be attributed to the weakening of the Japanese yen against the US dollar during this period.

However, if we examine Japan’s real GDP in local currency, it grew at a CAGR of 0.4% from ¥517.8 trillion in 2012 to ¥536.7 trillion in 2021. In comparison, the CAGR of the iShares MSCI Japan ETF between 2012 and 2022 was 3.4%. The iShares MSCI Japan ETF is heavily dominated by Toyota Motor Corporation, which is also the only Japanese company among the top 100 largest global companies by market capitalisation.

Between 2012 and 2021, high-income countries or regions experienced an average annual growth rate of 1.7%, according to the World Bank. Japan’s relatively slower GDP growth during this period may be attributed to the “Lost Decades,” a period of stagnant economic growth and price deflation following the collapse of the Japanese asset price bubble in the late 1980s.

Economists have attributed the Lost Decades in Japan to several factors, including the Bank of Japan’s interest rate policy mistakes, credit crunch, and liquidity trap. In a deflationary environment, where prices are expected to fall, consumers tend to hold onto their cash instead of spending or investing, which leads to lower consumer spending.

Banks in Japan were hesitant to lend due to the credit crunch, which was aggravated by declining corporate investment as businesses refrained from expanding. This created a negative feedback loop and compounded the impact of the country’s population issues, such as low birth rates, a shrinking and ageing population, and a labor shortage.

More than 30 years after the stock market crash, Japan was still grappling with the consequences of the Lost Decades. The 1980s had seen an overly optimistic stock market, with the Nikkei 225 index surging about sixfold, while Japan’s real GDP only increased by less than half during the same period. To this day, the index has yet to recover its previous peak, which was recorded in 1989.


Between 2012 and 2021, Singapore achieved a 3.1% CAGR growth in its GDP, but the SPDR® Straits Times Index ETF remained relatively stagnant. The largest companies in Singapore are mainly dividend stocks such as banks and REITs, including DBS Group and CapitaLand Ascendas REIT.

Out of the top 30 constituents of the ETF, all except for SATS and Emperador distributed a dividend in their latest financial year. The share prices of the top three constituents of the ETF, namely DBS, Oversea-Chinese Banking Corporation, and United Overseas Bank, have performed well in the past decade.

Despite Singapore’s advanced economic status, it has attracted a considerable amount of foreign direct investment (FDI) compared to its counterparts. Along with Vietnam, Singapore has the fastest FDI growth rate amongst these nations, which is a significant achievement.

Singapore has been a shining example for countries aspiring to transition from third-world to first-world status. Its business-friendly and tax-friendly policies, along with a stable political climate, make it an attractive location for companies to expand their presence or establish their headquarters. Additionally, Singapore’s excellent infrastructure, skilled labour pool, and welcoming immigration policies further encourage foreign direct investment. As corporate investments increase and high-paying jobs become available, it is expected that consumer spending and the country’s GDP will continue to grow in the future.


Between 2012 and 2021, Malaysia’s GDP recorded a CAGR of 3.6%. However, the iShares MSCI Malaysia ETF decreased in value from US$30.47 in 2012 to US$22.84 in 2022. This decline in ETF value can be attributed to the depreciation of the Malaysian ringgit against the U.S. dollar from 2014 to 2016, as the ETF was denominated in U.S. dollars. Additionally, the underperformance of the underlying FBM KLCI Composite Index and the 1MDB scandal — which came to light around 2015 — also contributed to the ETF’s decline. Political instability in the country and the exodus of foreign institutional funds also played a role. In 2021, Malaysia ranked 62th among 180 countries or regions surveyed in the Corruption Perception Index.

According to the World Bank, Malaysia’s productivity growth has been lower than that of several global and regional comparators over the past 25 years. To generate higher-paying employment opportunities, increased investment is necessary.

Source: The Edge 

Following the Asian Financial Crisis, Malaysia’s unconventional capital control measures eroded foreign investors’ confidence and trust. Restrictions on share sales by foreign fund managers and foreigners made investing in Malaysia less attractive. The Central Limit Order Book (CLOB) saga is a memory that some Singaporean investors may recall vividly.

As an export-driven nation, a depreciation of the ringgit can benefit export companies, but foreign investors are concerned about the impact of currency depreciation on their investments in Malaysia. The manufacturing and agriculture sectors, which rely heavily on foreign labor, are particularly vulnerable. Unfortunately, foreign direct investment (FDI) in Malaysia has been declining in general, which is concerning when compared to other Southeast Asian countries (as shown below). On average, Malaysia has attracted the least amount of FDI in the decade prior to COVID-19, as well as in 2019. As a result, the cycle of losing out to neighbouring countries in terms of FDI continues.

 2010 to 2019Average FDICAGR of FDI Average percentage of FDI over GDP
MalaysiaUS$10.7 billion-1.9%3.4%
SingaporeUS$72.0 billion8.1%22.5%
IndonesiaUS$19.4 billion5.6%2.1%
VietnamUS$11.2 billion8.1%4.7%
Source: World Bank

The economy depends on and derived more than half of its GDP in 2021 from private consumption. Malaysians’ median income per capita is not as high as our peers. Most of us do not save enough, which gives very little room for further investment. In 2021, almost half of the Malaysians (47%) who responded to the Financial Capability and Inclusion Demand Side Survey done by Bank Negara Malaysia faced difficulties raising RM1,000 during an emergency. The COVID-19 pandemic has further derailed Malaysia from its path towards a high-income nation.

In 2022, over half of Malaysia’s GDP was derived from private consumption, and its median income per capita is lower than that of its peers. Most Malaysians do not save enough, which leaves little room for further investment. In fact, nearly half (47%) of the Malaysians who participated in the Financial Capability and Inclusion Demand Side Survey conducted by Bank Negara Malaysia in 2021 reported difficulty raising RM1,000 in the event of an emergency. The COVID-19 pandemic has also hindered Malaysia’s progress towards becoming a high-income nation.

The fifth perspective

The stock market is not the economy. In fact, stock markets around the world crashed in March 2020 before national GDPs dropped due to the global lockdowns. The stock market is often influenced by sentiment and can be driven by non-fundamental factors, as investors and traders may act irrationally.

It is important to note that this article cannot establish a correlation or relationship between GDP and the stock market without conducting proper statistical analysis. Results may also differ if a different timeframe is used. GDP data is also backward-looking and may be dated by the time it is released. The impact of GDP on the stock market may also be short-lived.

Moreover, while an index ETF may not have performed well in the past decade, there may still be good-quality growth or dividend stocks that can be selected individually in each market. Finally, companies may invest overseas, and these investments may not be reflected in a country’s GDP.

Shak Chee Hoi

Chee Hoi is an investor and research analyst at The Fifth Person. He was previously involved in wildlife conservation work with a non-governmental organisation as well as sustainability consultancy work. He personally believes in impacting society and the environment for the greater good.

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