Emerging Equity Markets in a Globalizing World

Abstract

Given the dramatic globalization over the past twenty years, does it make sense to segregate global equities into “developed” and “emerging” market buckets? We argue that the answer is still yes. While correlations between developed and emerging markets have increased, the process of integration of these markets into world markets is incomplete. To some degree, this accounts for the disparity between emerging equity market capitalization in investable world equity market benchmarks versus emerging market economies in the world economy. Currently, emerging markets account for about 40% of world GDP. However, they only account for 10.8% of world equity capitalization. This incomplete integration along with the relatively small equity market capitalization should be taken into account in portfolio allocation. Other asset classes within emerging markets (such as corporate bonds and currencies) are also viable.

Keywords: Emerging markets, GDP weights, Market integration, Market segmentation, Illiquidity, Liquidity, Portfolio risk, Portfolio correlation, Market capitalization, Risk characteristics, Cross-sectional volatility, Valuation ratios, Asset class

JEL Classification: G11, G15, G18, G24, F36