Emerging Markets

Interpretation

The MSCI Emerging Market Indices comprise a series of indices designed to track the stock market performance in emerging economies. An emerging market, as defined by MSCI, is a country experiencing rapid economic growth and development, often marked by increasing industrialization, developing infrastructure, expanding capital markets, and rising standards of living. These markets are characterized by their potential for high growth, though they may also present greater volatility and risks compared to developed markets.
Together these indices form the MSCI Emerging Market Index, which is a widely recognized benchmark for emerging market equities.
MSCI country indices are designed to include about 85% of the free float-adjusted market capitalization in each country. This approach ensures that the indices provide a comprehensive representation of the large and mid-cap segments of the respective national equity markets. The country index versions in the charts above are all denominated in USD, capitalization-weighted, and do not include dividends.

Further Information

• MSCI: Emerging Markets Indexes
• Longermtrends: Developed Markets
• Longermtrends: Emerging vs. Developed Markets
• Longermtrends: Frontier Markets
• Longermtrends: (All) MSCI Country Indices

Interpretation

This heatmap shows how the stock markets of various emerging economies move in relation to one another. Red squares indicate a positive correlation (markets moving together), while blue shows a negative correlation. Emerging markets often show more varied correlations than developed markets, influenced by both global risk sentiment and local economic factors. Notice the regional clusters, such as those in Latin America or Eastern Europe.

For investors, emerging markets can offer significant diversification benefits due to their lower correlation with developed markets. However, as this chart shows, they are not a monolithic bloc. Understanding these relationships is key to building a globally diversified portfolio and applying Ray Dalio's "Holy Grail of Investing" principle effectively.

To create this chart, weekly returns are calculated for each country's MSCI index, and the Pearson correlation is computed for every pair. The heatmap is then organized using hierarchical clustering to group countries with the most similar market performance, revealing underlying regional and economic patterns.

Interpretation

The Minimum Spanning Tree (MST) simplifies the correlation matrix by showing only the strongest connections between indices. If two indices are linked, they have a strong positive correlation and tend to move in tandem. This helps identify clusters of related assets and is useful for portfolio diversification.
The tree is constructed by converting the correlations into distances and then finding the set of connections that links all indices with the minimum total distance. As noted by Marti, Gautier, et al. (2017), the optimal Markowitz portfolio is often found at the tree's outskirts, and the tree tends to shrink during a financial crisis.

Data Sources

• Central and Eastern Europe
• MSCI Czech Republic
• MSCI Greece
• MSCI Hungary
• MSCI Poland
• MSCI Turkey
• Southeast Asia
• MSCI Indonesia
• MSCI Malaysia
• MSCI Philippines
• MSCI Thailand
• East and South Asia
• MSCI China
• MSCI Korea
• MSCI Taiwan
• MSCI India
• Middle East and Africa
• MSCI Egypt
• MSCI Kuwait
• MSCI Qatar
• MSCI Saudi Arabia
• MSCI United Arab Emirates
• MSCI South Africa
• Latin America
• MSCI Brazil
• MSCI Chile
• MSCI Colombia
• MSCI Peru