Comparative International Equity Portfolio Diversification: A South African Investor Perspective

Abstract

This dissertation explores the potential international diversification benefits for a South African equity investor across the Developed Western Markets and Emerging Asian Markets. The step-down mean-variance spanning approach is employed to test the statistical significance of the diversification benefits across the two regional global markets. The empirical evidence suggests that international diversification of the local South African equity portfolio into Emerging Asian Markets completely dominate the diversification into Developed Western Markets. This diversification strategy has a superior tangency portfolio and minimum-variance portfolio. The Sharpe ratio is used to economically quantify the potential diversification benefits. The dominant strategy has a 28% increase in the Sharpe Ratio when compared to the diversification into Developed Western Markets. The Vector Autoregression model is used to study the integration between markets which may be a key driving factor in the different diversification benefits. The model deduces that there is higher integration between the Developed Western Markets and both the South African market and Emerging Asian Markets. The Developed Western Markets also have lower average returns in comparison to the Emerging Asian Markets. These factors penalise the diversification benefits into Developed Western Markets leading to diversification into Emerging Asian Markets being the favourable strategy. These results contribute to the limited body of knowledge which is available on diversification benefits from a South African investor perspective. This will assist to inform local investment policies and strategies in order to develop optimal portfolios in South Africa.