Morningstar Magazine - December 2017/January 2018 - 53

EXHIBIT 4

Moving in Tandem There are cyclical differences, but over time emerging and
developed markets have been closely linked.
Rolling 3-Year Correlation of the MSCI Emerging Markets Index and the MSCI World Index
1.0
0.84
0.8
0.6
0.4
0.2
0.0
2004 2005

2006 2007

2008 2009

2010 2011

2012

2013

2014

2015

2016

2017

Source: Morningstar. Data as of 09/30/2017.

However, it's safe to say that country
membership and the level of access to previously
closed markets will remain in flux.
For example, as part of its 2017 annual market
classification review, MSCI announced that it will
include China A-shares in the MSCI Emerging
Markets and MSCI ACWI indexes. MSCI's decision,
which follows FTSE Russell's 2015 launch of China
A-share inclusion indexes, is recognition of the
significant strides China has made toward opening
its capital markets to foreign investors in recent
years. Exchange-traded funds and index funds
tracking the affected indexes will add some or all
of the 222 A-shares earmarked for inclusion to
their portfolios and will ultimately respond to any
subsequent steps that materialize as part of
this longer-term road map toward bringing onshore
Chinese stocks into the fold.
While the China A-share inclusion won't move
the needle much in the near term, it is a significant
first step toward greater global integration of
the domestic Chinese capital market. The initial
A-share inclusion target represents a small
weighting in the affected benchmarks (about 0.10%
of the MSCI ACWI and 0.73% of the MSCI
Emerging Markets Index). Ultimately, these moves
will bring China's standing in equity indexes
more in line with the true footprint of the nation's
capital markets and its economy at large.

Also of note is the fact that both MSCI and
FTSE have Saudi Arabia on their short lists
for potential inclusion in their emerging-markets
benchmarks. Further opening of the kingdom's
capital markets and the potential for an initial
public offering of Saudi Aramco could
have a significant effect on the character of
the pool of emerging-markets stocks.
Implications for Portfolio Construction

Per MSCI's definition, emerging-markets stocks
represent about 7% of a globally diversified 60/40
stock/bond portfolio, at market weight. These
stocks' potential contribution to long-term
returns is clear but will likely come at the expense
of pronounced volatility. As is the case with
international stocks more broadly, the prospective
diversification benefits of an allocation to
emerging-markets stocks may be limited and
could even wane with time.
E X H I BIT 4 shows the rolling three-year correlation
between the MSCI Emerging Markets and MSCI
World indexes. The introduction of the emergingmarkets index in 2001 brought emerging-markets
investing into the mainstream, which increased
the correlation between emerging and developed
markets. There are still cyclical differences, as
evidenced by the recent plummet and rebound of
emerging markets, but the two benchmarks have
generally been closely linked over time.

This could be attributable to a number of factors.
More widespread recognition of the group
as a distinct asset class and greater investment-
particularly by foreign investors-could be
partly to blame. Simultaneously, the degree to
which these countries have become integrated in
the broader global economy has unquestionably increased. To the extent that these nations'
prospects have stronger ties to those of
more advanced economies, the greater degree
of co-movement among their stock markets
makes sense.
Also, growth in emerging markets has been a boon
for many global firms that have stocks trading on
developed-markets exchanges. The MSCI USA
With EM Exposure Index selects constituents from
the MSCI USA Index and weights them on the
basis of the proportion of their revenue derived
from emerging-markets countries. The
benchmark's largest holding is Apple AAPL,
which received a 13.62% weighting as of the end
of September. This underscores the degree of
connectivity between emerging and developed
markets. It is unlikely this interdependence
will diminish anytime soon. This could mean that
the correlation between emerging and
developed markets will remain elevated and that
the prospective diversification benefits of
emerging-markets stocks will diminish from the
perspective of a U.S. investor.
Key Takeaways
1 Emerging markets are dynamic by definition.

The makeup of this group will continue
to evolve as these nations either climb or fall off
the economic development ladder.
2 Expect a bumpy ride. These countries' progress will

be lumpy and their stock markets' returns lumpier
still. As always, reaping the prospective rewards
of an allocation to emerging-markets stocks hinges
on investors' ability to buckle up and sit tight.
3 Diversification benefits may dwindle. To the

extent that emerging markets continue to integrate
into the global economy, they may move in lockstep with their developed-markets counterparts. K
Ben Johnson, CFA is director, passive strategies, global
manager research with Morningstar Research Services.

global.morningstar.com/Morningstarmagazine

53


http://global.morningstar.com/Morningstarmagazine

Table of Contents for the Digital Edition of Morningstar Magazine - December 2017/January 2018

Contents
Morningstar Magazine - December 2017/January 2018 - Cover1
Morningstar Magazine - December 2017/January 2018 - Cover2
Morningstar Magazine - December 2017/January 2018 - 1
Morningstar Magazine - December 2017/January 2018 - 2
Morningstar Magazine - December 2017/January 2018 - Contents
Morningstar Magazine - December 2017/January 2018 - 4
Morningstar Magazine - December 2017/January 2018 - 5
Morningstar Magazine - December 2017/January 2018 - 6
Morningstar Magazine - December 2017/January 2018 - 7
Morningstar Magazine - December 2017/January 2018 - 8
Morningstar Magazine - December 2017/January 2018 - 9
Morningstar Magazine - December 2017/January 2018 - 10
Morningstar Magazine - December 2017/January 2018 - 11
Morningstar Magazine - December 2017/January 2018 - 12
Morningstar Magazine - December 2017/January 2018 - 13
Morningstar Magazine - December 2017/January 2018 - 14
Morningstar Magazine - December 2017/January 2018 - 15
Morningstar Magazine - December 2017/January 2018 - 16
Morningstar Magazine - December 2017/January 2018 - 17
Morningstar Magazine - December 2017/January 2018 - 18
Morningstar Magazine - December 2017/January 2018 - 19
Morningstar Magazine - December 2017/January 2018 - 20
Morningstar Magazine - December 2017/January 2018 - 21
Morningstar Magazine - December 2017/January 2018 - 22
Morningstar Magazine - December 2017/January 2018 - 23
Morningstar Magazine - December 2017/January 2018 - 24
Morningstar Magazine - December 2017/January 2018 - 25
Morningstar Magazine - December 2017/January 2018 - 26
Morningstar Magazine - December 2017/January 2018 - 27
Morningstar Magazine - December 2017/January 2018 - 28
Morningstar Magazine - December 2017/January 2018 - 29
Morningstar Magazine - December 2017/January 2018 - 30
Morningstar Magazine - December 2017/January 2018 - 31
Morningstar Magazine - December 2017/January 2018 - 32
Morningstar Magazine - December 2017/January 2018 - 33
Morningstar Magazine - December 2017/January 2018 - 34
Morningstar Magazine - December 2017/January 2018 - 35
Morningstar Magazine - December 2017/January 2018 - 36
Morningstar Magazine - December 2017/January 2018 - 37
Morningstar Magazine - December 2017/January 2018 - 38
Morningstar Magazine - December 2017/January 2018 - 39
Morningstar Magazine - December 2017/January 2018 - 40
Morningstar Magazine - December 2017/January 2018 - 41
Morningstar Magazine - December 2017/January 2018 - 42
Morningstar Magazine - December 2017/January 2018 - 43
Morningstar Magazine - December 2017/January 2018 - 44
Morningstar Magazine - December 2017/January 2018 - 45
Morningstar Magazine - December 2017/January 2018 - 46
Morningstar Magazine - December 2017/January 2018 - 47
Morningstar Magazine - December 2017/January 2018 - 48
Morningstar Magazine - December 2017/January 2018 - 49
Morningstar Magazine - December 2017/January 2018 - 50
Morningstar Magazine - December 2017/January 2018 - 51
Morningstar Magazine - December 2017/January 2018 - 52
Morningstar Magazine - December 2017/January 2018 - 53
Morningstar Magazine - December 2017/January 2018 - 54
Morningstar Magazine - December 2017/January 2018 - 55
Morningstar Magazine - December 2017/January 2018 - 56
Morningstar Magazine - December 2017/January 2018 - 57
Morningstar Magazine - December 2017/January 2018 - 58
Morningstar Magazine - December 2017/January 2018 - 59
Morningstar Magazine - December 2017/January 2018 - 60
Morningstar Magazine - December 2017/January 2018 - 61
Morningstar Magazine - December 2017/January 2018 - 62
Morningstar Magazine - December 2017/January 2018 - 63
Morningstar Magazine - December 2017/January 2018 - 64
Morningstar Magazine - December 2017/January 2018 - 65
Morningstar Magazine - December 2017/January 2018 - 66
Morningstar Magazine - December 2017/January 2018 - 67
Morningstar Magazine - December 2017/January 2018 - 68
Morningstar Magazine - December 2017/January 2018 - 69
Morningstar Magazine - December 2017/January 2018 - 70
Morningstar Magazine - December 2017/January 2018 - 71
Morningstar Magazine - December 2017/January 2018 - 72
Morningstar Magazine - December 2017/January 2018 - 73
Morningstar Magazine - December 2017/January 2018 - 74
Morningstar Magazine - December 2017/January 2018 - 75
Morningstar Magazine - December 2017/January 2018 - 76
Morningstar Magazine - December 2017/January 2018 - 77
Morningstar Magazine - December 2017/January 2018 - 78
Morningstar Magazine - December 2017/January 2018 - 79
Morningstar Magazine - December 2017/January 2018 - 80
Morningstar Magazine - December 2017/January 2018 - Cover3
Morningstar Magazine - December 2017/January 2018 - Cover4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q3
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q2
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019winter
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019fall
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019summer
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019spring
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20191201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20181011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20181201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20171011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20171201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20161011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20161201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20151011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20151201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20141011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20141201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20131011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20131201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20121011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120405
https://www.nxtbook.com/nxtbooks/morningstar/investorconference2012
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20121201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20111011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20111201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20101011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100607_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100405_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20101201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20091011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008fall
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008summer
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007spring
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007fall
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007summer
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008spring
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008catalog
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008winter
https://www.nxtbookmedia.com