EM versus DM – the roles are switched but for how long?

Emerging markets are becoming less risky. On a short-term financial measure, a review of stock sensitivity versus the S&P 500 (SPX) shows a decline in risk. The driver for this decrease in risk is related to the macroeconomics between the developed world and the rest of the world or emerging markets. The volatility of the developed world has generally been less than emerging countries for the entire post-WWII period. The emerging market world has been marked by extreme declines, periods of slow growth, and volatility. Emerging markets have faced "sudden stops" from currency failures, crisis with short-term funding, and outright default. However, these risk have diminished over the last decade. The central banks have followed a policy of growing foreign exchange reserves and controlling inflation.. Governments have followed policies that have been business friendly and have led to more competitive markets. There also has been further integration across countries

A simple regression of beta between the EFA and EEM stock indices and the SPX shows that the beta for developed stock markets has risen over the last two years relative to the five years prior to the Great Recession. At the same time the beta for the EEM index has fallen over the last two years. We took out the volatile recession period as abnormal; however, when the last three years are used the same results apply. There is a marked decrease in volatility with emerging markets.