Correlation

Category: Quant Insight

Emerging market stocks have a higher than usual correlation to the overall basket of asset, as do Treasurys. This likely highlights the push/pull that exists between EM economic growth and US financial policy. We believe the current tax reform bill appears to add to the deficit likely requiring higher Treasury rates and thus creating a trade balance in favor of the emerging economies. This is a trade that could end up shaping the entirety of the markets over the next 10 years.

The correlation figure measures how each asset return moves in relationship to the broader basket of asset returns listed on the X axis. When correlations are high or rising, it may indicate that economic movements and sentiment are driving the majority of returns, which could potentially make security selection challenging.

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