One of the main reasons for investing in frontier market equities is to take advantage of reduced correlations with more developed equity markets. This is a key feature for anyone organizing their own diversified global portfolio, and one of the few ways investors can reliably augment their returns. We take a look at frontier stock market correlations with developed and emerging markets every year (see how these correlations have shifted since 2014 and 2013).
We use 36-month, monthly correlations to calculate our correlations. We’ve embedded most of the correlations with Excel Online, and you can download our data with the button right beneath the embedded window.
Summary
- Global stock correlations have gone down significantly in 2015, even in emerging markets
- This is possibly due to QE’s impact fading out, especially with the US being the sole country contemplating raising rates while the rest of the world continues to ease
- There may also be more of a focus on local issues with “easy” returns gone and a flight to safety impacting emerging markets a lot, with Russia and China the best examples
- Frontier markets remain the best place to find markets uncorrelated with the rest of the market
Developing and Emerging Market Correlations
- We look at correlations between developing and emerging markets first to establish a baseline of comparison for frontier markets
- Correlations to the US markets outside of North America and Europe are all below 0.500 now with the exception of the MSCI EM index
- Correlations in Russia and China have gone almost to zero, with sanctions and state interventions a likely cause
African Frontier Stock Market Correlation
- Oddly enough, Africa as a whole had the highest correlation to the US, albeit only a 0.235 correlation so less than half that of developed markets
- Zimbabwe, Kenya, Uganda, and Nigeria led the way as the most correlated with the US and Europe
- Malawi stands out as negatively correlated to the US, with Cote D’Ivoire, Tanzania, and Zambia only around 0.10 correlation
Central & Latin American Frontier Stock Market Correlation
- Despite the closer proximity to the US (which helped boost correlations in previous years), correlations here have also plummeted vs the US
- EM Latin America (Brazil and Mexico) had correlations above 0.40, while the more developed frontier markets like Chile and Colombia hovered above 0.30
- As expected, smaller countries and less developed ones were the least correlated, with Jamaica standing out with a negative correlation, and Argentina, Panama, and Peru also very uncorrelated to the US
- Many of the smaller nations like Jamaica, Panama, and Trinidad and Tobago were uncorrelated not just with the US, but with other countries in the region
European & Central Asian Frontier Stock Market Correlation
- Surprisingly, this was the least correlated region to the US, and only had a less than 0.10 correlation to Europe
- Malta, Slovakia, and Bosnia & Herzegovina stood out with negative correlations to the US, and almost no correlation to Europe
- Cyprus, Macedonia, and Mongolia were also almost uncorrelated to developed markets
Middle Eastern Frontier Stock Market Correlation
- Kuwait and Saudi Arabia were the most correlated to the US at over 0.35
- Iraq is perhaps the least correlated market to the rest of the world, with negative correlations against all the other countries in the same region
Asia Frontier Stock Market Correlation
- Asia is the most correlated region to the overall MSCI FM Index, due mostly to the Philippines and Vietnam
- Cambodia was negatively correlated to most other countries, even to nearby Laos
- Pakistan was also surprisingly uncorrelated with India despite proximity
