Countries Versus Industries in Emerging Markets

Abstract

Should investors in emerging markets focus on diversifying across countries or diversifying across industries? This question, widely debated in developed markets, and particularly in Europe, has received little attention in emerging markets. Using a normative approach that disentangles the impact of investor behavior from the opportunities offered by capital markets, the authors find that country effects dominate industry effects. It follows from these results that, despite the increasing globalization of emerging markets, investors should focus their diversification efforts on countries rather than on industries.