March 2012_issue_10
Despite the intense fi ght between emerging and developed market managers, they are increasingly buying the same beta. One and three-year correlations between developed and emerging markets have increased 54% and 58% respectively since 31 December 1990 and 31 January 2012 to 88% and 87% respectively. As trade and fi nancial markets become increasingly globalised, the increased correlation is common sense, but it does present investors with a conundrum: in a world fi xated with diversifying risk, the massive increase in correlations undermines the notion that emerging markets provide diversifi cation. But every cloud has a silver lining. High correlation also means developed markets will benefi t from the vast majority of emerging market growth, giving investors in developed markets the chance to ride the wave of emerging market growth without taking on additional currency or political risk, or exposing themselves to the higher volatility inherent in emerging markets.
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