The Changing Landscape of Global Stock Market Correlations
Since the 1970s, correlations between world stock markets have been on the rise, driven by globalization. However, the outbreak of COVID-19 in 2020 disrupted this trend, leading to a decoupling among global equity markets.
An analysis of stock market indices since 2015 reveals a significant shift: the average correlation between different indices has decreased across the board.
While some indices like the S&P 500 saw a slight drop in correlation, others like the Shanghai Stock Exchange Composite Index (SSE) and the Hang Seng (HSI) in China, and the RTS in Russia, experienced a more significant divergence from other markets.
Correlation Trends
| 2015 to 2020 | February 2020 to December 2023 | January 2022 to December 2023 |
In the later time frames, SSE, HSI, and RTS showed a significant decrease in correlation with other indices, indicating a potential regime change in global finance.
Global Markets Correlation Changes
| S&P 500 | FTSE 250 | DAX |
Implications for the Future
The decline in correlations between stock markets post-COVID-19 signals a shift in the global financial landscape. This reversal of the globalization trend seen since the 1970s could have far-reaching consequences for investors worldwide.
Conclusion
The changing correlation patterns among global stock markets suggest a fundamental restructuring post-2020. Whether this shift is temporary or marks a more significant transformation remains to be seen in the coming years.
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Disclaimer: All opinions expressed in this post are solely those of the author and should not be construed as investment advice. Views expressed do not necessarily reflect the opinions of CFA Institute or the author’s employer.