Emerging Equity Markets in a Globalized World

Abstract

Does the globalization process of the past 25 years obviate the need to segregate global equities into developed and emerging market buckets? We argue the answer is no. Emerging equity markets differ in a statistically significant fashion from developed markets, featuring much lower levels of GDP per capita and equity integration. They also have significantly lower stock market development levels and, on average, feature lower valuation ratios. Emerging markets have morphed into high-beta investments that are highly correlated with developed markets. The historical performance of emerging market investing is much improved by replacing value-weighted indices with alternative weighting schemes, including equal weights, valuation-based weights, and GDP weights.

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