Parametric has long asserted that the country allocation decision in emerging-market portfolios is the primary driver of returns. We’ve also differentiated this from the case of investing in developed international markets, where correlations between developed countries are generally higher than those between emerging-market countries, making sector and style decisions more meaningful. These assertions are based on several publications found in academic literature as well as Parametric’s own research.
In this paper, we examine the contributions of various factors to the cross-sectional volatility (CSV) of stock returns in an index. Our aim is to show that allocation among countries continues to be the primary source of return in emerging markets.