Nowhere Left to Hide? Stock Market Correlation, Regional Diversification, and the Case for Investing in Africa
Todd J. Moss
Center for Global Development
Federal Reserve Banks - Emerging Markets and International Affairs Group
March 7, 2013
Center for Global Development Working Paper No. 316
Investors diversify their portfolios to boost returns and manage risk. However, the benefits of diversifying across geographic regions are reduced if markets are highly correlated. This paper examines trends over the past two decades and finds, as expected from global market integration, that regional indices have become increasingly correlated with the S&P 500 index. Sub-Saharan Africa is also part of this trend, but is a notable laggard. For instance, in 2010 the correlation with the S&P500 was 0.86 for markets in Latin America, 0.79 for Asia, and just 0.31 for sub-Saharan markets (excluding South Africa). Additionally, correlations among African markets are generally very low. While there remain barriers to exploiting this trend, Africa’s integration lag may present opportunities for investors seeking regional diversification — and policymakers seeking to attract greater portfolio investment to the continent.
Number of Pages in PDF File: 20
Keywords: international financial markets, portfolio choice, emerging markets, Africa, market correlation, stock markets
JEL Classification: G11, G15, F36
Date posted: March 16, 2013
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