Want Diversification? Invest in Sweden

Buying Russian stocks when you have exposure to the Indonesian market is not true diversification. We reveal how seemingly uncorrelated markets move in tandem

Emma Wall 4 September, 2013 | 7:00AM
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Did you know that for the last decade the UK stock market has moved in line with that of South Africa? Or that when the Turkish market slumps more often than not so does the India indices?

The advent of the internet and increasingly international trading routes has meant that economies all over the world are more correlated than ever.

The announcement of the Federal Bank in the US that it is to taper its quantitative easing programme has had a negative effect on emerging market stock markets; a slowdown Chinese growth affects the oil price; flooding in Australia sends commodity prices up - which in turn is good news for Brazil.

But these co-dependencies are well known - unlike the relationship between Korea and Brazil.

Correlation research by Absolute Strategy reveals that based on 13-week periods measured over 10 years a surprising number of stock markets move in tandem. 

Very few stock markets operate entirely separately from their peers, so investors' portfolios may experience double the hit should a market fall and they hold a correlating indices. 

Jacob de Tusch-Lec, who runs the Artemis Global Income fund, said that investors need to be aware of how inter-dependent international markets are.

“Many investors think they are diversifying by buying up South East Asia exposure when they already own a China fund, but in times of stress in the system if the Shanghai Composite Index falls, so will the stock markets of Singapore, Indonesia, India, Taiwan, Korea - and even further flung nations such as Brazil and India," he said.

"In many ways, holding a Brazilian bank is not too different to holding a mining stock, as the Brazilian economy is so dependent on commodity prices. However, it is fair to say that these links really only become very important when the market is going through periods of stress and correlations go up very quickly."

Based on the Absolute Strategy research, investors can purposefully choose to spread their funds between markets that are either uncorrelated, illustrated without a connecting line - such as Australia and Germany, or negatively correlated, illustrated with a red line - such as America and Sweden.

Factsheets will offer investors a snapshot of a fund's geographical exposure. To determine your geographical weightings across an entire portfolio of funds investors can use Morningstar's  Portfolio X-Ray tool  and adjust their holdings accordingly. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Emma Wall  is former Senior International Editor for Morningstar