Is the West’s Money Really Diversified in the East?
A Closer Look at Portfolio Diversification
Benefits in Asia

Abstract

The financial crisis and the lackluster domestic equity markets coupled with substantially low interest rates have made the wealthy West shift its focus on emerging markets and in particular Asia. Global wealth managers are highlighting the returns in emerging markets to attract the high net worth investors in the West and providing them access to this asset class. While Western money moves to the East in the hope of high returns, it is necessary to evaluate whether these returns and the investment itself are safer in distant territories. Empirical evidence has established the fact that the U.S. exerts significant influence on developed and emerging markets on account of its dominant position in international economy and trade. Further, the individual economies of regions like Asia have started showing signs of economic integration. A direct implication of this could be that returns in Asian stock markets will get significantly affected by developments in the U.S. or Asia region itself, thereby diluting the portfolio diversification benefits. This article examines this issue by studying the extent to which individual stock markets in Asia are integrated with the U.S. and other markets in the region. The findings of the study can help in deciding optimal asset allocation strategy within the region.

TOPICS: Wealth management, emerging, exchanges/markets/clearinghouses, portfolio construction