By
Borsgade
Karen Karniol-Tambour and her colleagues from Bridgewater has published an interesting article analyzing the maximizing the benefits of geographic diversification away from the US market and how it can be highly beneficial for portfolios. However, doing so can be difficult because many economies are closely linked to US conditions, making their markets highly correlated to US assets investors already own.
They argue that Europe and UK are not highly diversifying because of their conditions are closely linked to the US. On the end of the spectrum is China which is extremely diversifying because of China’s relatively closed economy and independent policy and conditions.
Because exposure to China is constrained for some investors, Japan represents the largest opportunity for diversification today [relative to the US]. It is a large market (the largest after Europe/UK), with listed companies that sell most of their products domestically, and has lowly correlated inflation and monetary policy.
India and Brazil are the next most diversifying. Their conditions tend to be less linked to the US, but their market sizes are materially smaller than Japan, and this size difference doesn’t reflect the difficulties that many foreign investors face trying to access them (especially in India).
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