An analysis of international diversification benefits and market co-movements from a South African perspective
Date
2014-08-06
Authors
Wade, John
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Abstract
Globalization has had a profound impact on financial markets and the effects on increasing equity return correlations from a U.S. perspective are well documented in previous literature. With increased return correlations, diversification benefits are diminished over time for investors. Few studies have examined the effects of globalization on developing economies, and more specifically, South Africa. This report looks into the performance of the JSE Top40 relative to other major economies from 1999 through to the beginning of 2013. The study identifies whether return correlations are increasing for South African investors and how this affects their global diversification benefits and whether global diversification still remains beneficial. The results suggest that developing economies have exhibited superior performance on a raw returns and risk adjusted basis relative to developed economies. The results are instructive that from a South African perspective, no significant trends of increasing return correlations are evident. Developing economies are found to exhibit lower return correlations than developed economies, and in some instances negative correlations exist among the developing economies. This leads to a strong conclusion that South African investors seeking to maximise returns and minimize risk should diversify, particularly in developing economies. The benefits of diversification are unlikely to be eroded for South Africans over the foreseeable future based on these findings.