Country selection still matters when decomposing risk for emerging equity markets, not so much for developed markets. Some updated charts on the variance decomposition between developed and emerging markets shows that EM markets are still not fully integrated with DM markets. Country choice and awareness are still important.
For developed markets, market beta followed by industry risk are the two most important components of variance decomposition. Country risk has shrunk over the last three decades. DM markets have become more deeply integrated. A large corporation in the UK or Switzerland and not much different than a US firm in the same industry.
While there is a similar trend toward integration in emerging markets, the movement is much less pronounced. Market risk and country risk explain 90% of the variance with the relative importance respectively 2/3rds and 1/3rd. Focusing on country risk is still important. Of course, there is variation on geography or region integration, but the country macro environment for EM matters.
EM investing should be integrated across equity, bond, and currency markets based on the macro environment. Capital flows into EM equities will be sensitive to macro events with sensitivity associated with overall trade and financial integration. The need for a global/local macro holistic approach is greater than developed markets that will have a stronger focus on global macro market beta considerations.
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