Saturday, November 08, 2008

Diversification Not Working In This Cycle

It is often noted by investment experts that diversifying ones investments across the different asset classes (small, mid, international, etc.) will provide an investor with better returns. And not just better returns, but better returns on a risk adjusted basis.

In this bear market cycle, the below tables note that no market has been spared this year or since the market peak in October of 2007.

(click table for larger image)

Global Equity Market Returns table through October 31, 2008
Not surprisingly then, correlations have increased across all markets as noted in the table below. Standard & Poor's observations detail the magnitude of some of the moves higher in correlations for some of the markets:
  • The MSCI-EAFE index, a developed international equity benchmark, is now moving in unison with the S&P 500 index 89% of the time, up from 80% on August 31.
  • The MSCI Emerging Markets index’s correlation to the 500 has jumped to 81% from only 68% two months ago.
  • The MSCI Frontier Market index, long touted for its ability to “zig” when the 500 “zags,” has seen its 500 correlation surge to 63% from a mere 9% on August 31.
  • Lower capitalization stocks have offered no refuge, as the MSCI Global ex-U.S. Small & MidCap index has seen its correlation to the 500 rise to 87% from 74% two months earlier.
(click for larger image)

Global Equity Market correlations as of October 31, 2008It is not uncommon for global markets to become more correlated in severe bear markets. Maybe this higher correlation will be a positive when markets begin to recover?


Dwindling Diversification ($)
The Outlook
Standard & Poor's
By: Alec Young, International Equity Strategist
November 12, 2008

No comments :