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In Search of Global Diversification: Developed and Emerging Markets

Using monthly data from 1991 through 2004, we find evidence for dramatic convergence in properties of globally aggregated developed and emerging markets, greatly limiting the diversifying power of passive emerging markets investing. However, although equity returns in an 'average' emerging market follow the rest of the world more closely than a decade ago, emerging markets still constitute a dynamic and heterogeneous investment environment. We re-confirm that, given the importance of country selection, structuring the investment process along industries in a broad emerging markets universe may be premature. At the same time, there is a growing pool of emerging markets, where the importance of industry selection approaches that of country selection. Finally, we show that intra-market commonalities in equity returns offer significant diversification and return opportunities.