Why Have Global Correlations Increased?

We look at some potential reasons why foreign stocks do not offer as much diversification benefits today as they did in the past

Jeremy Glaser 12 November, 2012 | 4:32PM
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One reason why investors clamour for international stock exposure has traditionally been the belief that foreign stocks are reasonably uncorrelated from our home market. The theory is that stock markets in different countries will tend to move in different directions at different times. So if the UK market has a period of bad performance, perhaps German, Japanese, or Chinese stocks will be doing better. Over time, this diversification could help smooth out returns and provide better long-term returns with less risk.

But is this view accurate anymore? Are investors really gaining diversification when they look abroad? We looked at the difference in correlation between various international indexes to examine what kind of changes have happened during the last 15 years. Our top-level findings were that correlations, especially in emerging markets, have risen markedly during the time period.

The indexes that we tested were:

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

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Jeremy Glaser  is markets editor for Morningstar.com, the sister site of Morningstar.co.uk.

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