Nowhere Left to Hide? Stock Market Correlation, Regional Diversification, and the Case for Investing in Africa

20 Pages Posted: 16 Mar 2013  

Todd J. Moss

Center for Global Development

Ross Thuotte

Federal Reserve Banks - Emerging Markets and International Affairs Group

Date Written: March 7, 2013

Abstract

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.

Keywords: international financial markets, portfolio choice, emerging markets, Africa, market correlation, stock markets

JEL Classification: G11, G15, F36

Suggested Citation

Moss, Todd J. and Thuotte, Ross, Nowhere Left to Hide? Stock Market Correlation, Regional Diversification, and the Case for Investing in Africa (March 7, 2013). Center for Global Development Working Paper No. 316. Available at SSRN: https://ssrn.com/abstract=2233520 or http://dx.doi.org/10.2139/ssrn.2233520

Todd J. Moss (Contact Author)

Center for Global Development ( email )

2055 L St. NW
5th floor
Washington, DC 20036
United States

HOME PAGE: http://www.cgdev.org

Ross Thuotte

Federal Reserve Banks - Emerging Markets and International Affairs Group

33 Liberty Street
New York, NY 10045
United States

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