The ratio in the chart above divides the MSCI Emerging Markets Index by the MSCI World Index. "MSCI" (formerly Morgan Stanley Capital International) has been constructing and maintaining these indices since the late 1960s. Both indices are commonly used as performance benchmarks for equity funds. When the ratio rises, emerging markets outperform developed markets - and when it falls, developed markets outperform emerging markets.
The MSCI Emerging Markets Index comprises stocks from a diverse range of countries considered to be in the "emerging" stage of economic development. These countries often exhibit characteristics such as rapid economic growth, increasing industrialization, evolving financial systems, and transitioning political landscapes. As a result, investing in the MSCI Emerging Markets Index provides exposure to the potential growth opportunities and dynamism associated with these emerging economies.
The MSCI World Index is a widely recognized benchmark that measures the performance of equity markets across developed countries. Developed markets are characterized by well-established economies, advanced infrastructure, and strong regulatory frameworks. These markets are typically found in countries with high per capita income and stable political systems. They have mature industries and a diverse range of sectors, including finance, technology, healthcare, and consumer goods. Developed markets offer greater stability, transparency, and liquidity compared to emerging markets. They provide investors with access to well-regulated exchanges and established platforms for trading. Moreover, developed markets often have sophisticated financial systems and investor protection mechanisms in place, providing a greater sense of security for investors.
This chart gives a different view of the same data from the ratio above.
The MSCI Emerging Markets Index consits of 26 developing economies. As of April 2023, the index is most heavily weighted in China at 31.38%, Taiwan at 14.78%, and India at 13.69%.
The MSCI World Index consists of 23 developed economies. As of April 2023, the index is most heavily weighted in the Unites States at 67.74%, Japan at 6.1%, and the United Kingdom at 4.37%.
Both indices are capitalization-weighted and do not include dividends.
The chart above displays the 1-year rolling correlation coefficient between the MSCI Emerging Markets Index and the MSCI World Index. A correlation coefficient of +1 indicates a perfect positive correlation, meaning that the two indices moved in the same direction during the specified time window. Conversely, a correlation coefficient of -1 indicates that they moved in opposite directions.
Diversification is the practice of spreading investments across different asset classes to reduce risk. In his book Principles, Ray Dalio called diversification the “Holy Grail of Investing”. He realized that with fifteen to twenty uncorrelated return streams, he could dramatically reduce the risks without reducing the expected returns.
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