MSCI Country Indices

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Interpretation

The charts above include all country indices (in USD) from Developed Markets, Emerging Markets, and Frontier Markets.
The MSCI country indices follow the MSCI Index Calculation Methodology, a standardized approach for calculating MSCI Equity Indexes. This methodology ensures a consistent and accurate representation of market performance across various countries, incorporating factors like market capitalization weighting, adjustments for corporate actions, and other market dynamics. The indices aim to cover approximately 85% of the free float-adjusted market capitalization in each country, focusing on large and mid-cap segments.

Further Information

Correlation Heat Map

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1Y

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Interpretation

The chart above shows a heat map depicting the correlation coefficients among various msci country indices. Each index is represented on both the x and y axes, with intersections revealing the strength and direction of their correlation. A correlation coefficient of +1 indicates a perfect positive correlation, implying that two indices moved in the same direction during the specified time window. Conversely, a coefficient of -1 signifies that the indices moved in opposite directions. Colors range from deep blue, indicating a negative correlation, to dark red, signifying a strong positive correlation.
The correlation coefficient is important to consider for diversification because it helps investors assess the potential benefits of including different assets in their portfolios. Diversification is the practice of spreading investments across different assets to reduce risk. In his book Principles, Ray Dalio called diversification the “Holy Grail of Investing”. He realized that with fifteen to twenty uncorrelated return streams, he could dramatically reduce the risks without reducing the expected returns.

Correlation Spanning Tree

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1Y

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Interpretation

The minimum spanning tree (MST) simplifies the data from the correlation matrix above by retaining only the strongest correlations. If two indices are connected, it means that they are positively correlated and that they tend to move in tandem. By analyzing the structure of the MST, one can identify clusters of indices that move together. This visual tool is especially beneficial when considering international portfolio diversification. In fact, Marti, Gautier, et al. (2017) found that the optimal Markowitz portfolio is found at the outskirts of the tree and that the tree shrinks during a crisis.

Data Sources

*The country indices marked with an asterisk are classified by MSCI as "Standalone Indices" and are not part of the MSCI Frontier Markets Index. They represent individual markets with significant barriers to foreign investment, such as stringent capital controls and regulatory constraints.


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