Calculating a cost of capital requires a growth assumption, with which one can also benchmark specific company growth rates. With a coverage universe capitalised at over USD 9 trillion across the main non-financial sectors and regions, we have what ought to be a representative sample to establish such a growth benchmark for our market average.
On a trailing 10 year average basis, Global real GDP growth has averaged just under +3% pa, including around +2% pa from the US and +8% pa from China, results that also correlate closely with our own data on organic sales growth. These trend rates however, have been declining, notwithstanding massive central bank interventions. While we have omitted China from our scope due to data reliability issues, combined central bank asset purchases by the US Fed, the Euro19's ECB and Japan's BoJ have been averaging over USD 800bn pa over the last decade, equivalent to over +2% pa on to annual GDP growth for these economies and over +80bps to the global rate of GDP growth. Include QE (or equivalent) programmes from the UK BoE, Switzerland and of course China and one might easily conclude that over +100bps of the +3% pa global GDP growth may have been artificially generated from what are ultimately unsustainable monetary sleights of hand.
As a consequence, our own market cost of equity model applies a real (constant price) growth assumption of +2% pa
Organic Sales Growth (coverage stocks)
A coverage universe that includes commodity sensitive sectors (Oils, Chemicals, Transport etc) and it should come as no surprise to see a relatively high level of revenue volatility.
Stretch out the time frame however, and the trend rate for our coverage universe comes in at just under +4.5% pa (current prices), which discounted for inflation implied from the 10 year US treasury of approx 1.9%, implies a real (constant) average growth of just under +2.5% pa. As, such, all very consistent with government sourced data on GDP growth
US GDP Growth (current prices)
At just under +4% pa, average trailing GDP growth (nominal) out of the US, lags the near +4.5% pa trend growth for organic sales from our coverage, which given the latter's inclusion of higher growth regions (including China) and possible slight over-representation of higher growth Tech sector stocks, is entirely consistent.
US GDP Growth (constant prices)
Fold in the inflation deflator and the above +4% a nominal GDP growth trend for the US edges down to just under +2% pa in constant prices.
Global GDP Growth by region (constant)
For every China, there is a laggard such as the EU to bring the global average back down.
There also remains a question surrounding the credibility of the Chinese growth data along with the downward pressure currently being experienced by all export dependent economies as the US pursues its policy of restoring onshore manufacturing
Regional Components of Global GDP Growth (constant)
Officially reported just under 16% of global GDP, China's claimed real growth of +6-7% therefore contributes over +1ppts of the approx +2.9% RCAGR (constant) global trend rate over the past 10 years.