This paper is the first in a series of publications that collectively examines the relevance of the S&P 500 in APAC, with each paper focusing on distinct aspects to provide a comprehensive understanding.
As Asia-Pacific (APAC) economies continue to grow and integrate with global markets, understanding the potential benefits of the S&P 500 for these regions could become increasingly relevant. Comprising the 500 largest publicly traded companies in the U.S., the S&P 500 not only represents a significant portion of the U.S. economy but also serves as a barometer for global market trends. This paper explores The 500™’s correlation to APAC markets and its potential for diversification in the region. This could be particularly relevant in a volatile market, and hence a case study based on the 2020 market sell-off has been done, highlighting the possible benefits of low correlation.
Low Correlation with APAC Markets: Why It Matters
One of the most significant reasons The 500 could be relevant to the APAC region is their low correlation. Diversifying across different regions with low correlation could reduce overall risk and volatility.
Correlation between the S&P 500 and APAC Markets
Correlation measures how two assets move in relation to each other. A low or negative correlation between markets can help mitigate risk, as downturns in one market do not necessarily affect another. According to historical data, The 500 has shown a daily correlation of 0.10-0.45 with various APAC markets over the five-year period studied.
The influence of U.S. stock movements on various APAC equity indices varied in magnitude. As illustrated in Exhibit 1, Singapore’s equity markets consistently demonstrated higher correlation with The 500 (approximately 40%) across both short-term (one-year) and medium-term (three- and five-year) periods. This is followed by Australian large-cap equities, which exhibited correlations ranging from 20% to 30% over the short and medium term. In contrast, equity markets in China, Hong Kong and New Zealand showed significantly lower correlations with The 500, typically below 10% in both the short and medium term. Other APAC markets, including India, Korea and Taiwan, fell within this range, exhibiting moderate correlations.
This correlation illustrates how movements in U.S. stock markets generally have a variable and less predictable impact on different APAC equity indices, which could mean potential benefits for risk mitigation.
