I saw a statement in Schweser that said “there is a high degree of correlation between developed nation economic expansion and a emerging market economic activity” Is that correct? My understanding was that correlation was low, in equity prices, due to the cultural, political and economic reasons. As such dont these two statements contradict each other? i.e. if the business cycles are correlated then how does an emerging market provide diversification?
I don’t have the material, but note that they are talking about economic activity, which is not exactly the same as stock market performance. So, on the idea that emerging markets make their money by exporting to developed markets (or by exporting to countries who export to developed markets), economic EXPANSION in developed economies tends to generate additional economic activity in emerging markets. As for equity markets, EM can still be correlated to DM, but as long as the correlation between EMs and DMs is less than the correlation of DMs amongst each other, you will have a diversification advantage. So these ideas can coexist to a certain extent.