DIVERSIFICATION USING EMERGING EQUITY MARKETS

Research indicates that international portfolio diversification results in risk reductionand/or improved rates of return across both developed and emerging markets.However, these diversification benefits with developed markets are now lower than theyhave ever been. The purpose of this project report has been to investigate the benefitsthat could have been derived, from a South African perspective, through internationaldiversification, over the period 1976 to 2003.The project report examined the mean returns and standard deviations, as well as intercountrycorrelation coefficients, in respect of the equity markets of 27 countries. Efficientex-post international portfolios were developed using the Markowitz mean-varianceapproach. Ex-ante investment strategies were also examined using a naïve “buy-themarket-approach.The main findings of the project report were: South African investors would have benefited historically from internationalportfolio diversification. However, the benefits of international portfoliodiversification have been diminishing over the last decade since the researchof Patrick (1996). The increased importance of emerging equity markets for internationalportfolio diversification was evidenced when comparing the Patrick (1996)research to the extended period (1976 to 2003). The importance of the investment horizon was evident as it was shown thatdifferent efficient international portfolios could result from the use of monthlyas opposed to annual returns. The impact of currency movements on the returns of foreign equity marketshad increased when compared to the previous study by Patrick (1996).