Emerging markets for Canadian portfolios: Are they still worth it?

Conover, Jensen, and Johnson (CJJ 2002) concluded that evaluating U.S monetary conditions is an important pre-requisite to identify an optimal asset allocation to international equities. Using 148 months of data, this study will identify emerging markets as worthy additions to a Canadian investor’s portfolio of developed market equities. The study will show that rising correlation between global equity markets has negated much of the diversification benefits. By incorporating emerging market equities, a Canadian portfolio’s returns increased by approximately .25% annually. When considering the Bank of Canada monetary policy, the benefits of investing in emerging markets accrued exclusively during periods of expansive Canadian monetary policy. During restrictive monetary conditions, there was no benefit for a Canadian portfolio to hold emerging market securities. The implication of the study is that evaluating Canadian monetary policy is a necessary prerequisite in identifying an optimal allocation to international equities for Canadian investors